Candlestick chart analysis – An impactful stock trading tool - Logical Nivesh (2024)

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• October 10, 2023

What are candlestick patterns?

Candlestick patterns are a powerful technical analysis tool that displays information about an asset’s price movement. This tool helps traders constantly check the price fluctuations of currencies, derivatives, and securities for intelligent and profitable investments. These patterns are represented in color bars, where each color coding shows an in-depth price analysis.

A typical candlestick chart consists of multiple horizontal bars or candles, which can be divided into three parts – Upper shadow, body, and lower shadow. Also, every candle has three basic features, namely,

• Body – It is either red or green and represents the open-to-close range.
• Wick – The wick is also known as shadow and indicates high and low intraday.
• Color – The color reveals the direction in which the market moves. Green (white) indicates a price increase, and red (black) depicts a price decrease.

How is candlestick chart analysis done?

A candlestick pattern represents the stock market’s opening, high, low, and closing (OHLC) prices. The rectangular body in the middle represents the opening and closing of trading prices. This body is either colored green (depicting a price increase) or red (showing a price decrease). The lines above and below the body are called wicks or shadows, representing the high and low of the traded stock price.

Learn candlestick patterns – Types of candle trading

It is important to note that a candlestick analysis is best done when the trader efficiently compares one candle with its preceding and next candles in the row. These patterns can be categorized into two sections – Bullish and bearish.

Bullish patterns – A bullish candle pattern represents an uptrend in the market movement after a price decline. Here the stock’s closing price is higher than the opening price and is represented by a green candle. Below are the different types of bullish patterns.

• Hammer pattern – This pattern is depicted with a short body and long lower wick. It is usually placed at the bottom of a downward trend and indicates that despite selling pressure, the firm buying surge shifted the prices upwards. A green hammer indicates a strong bull market.
• Inverse hammer pattern – It is similar to the bullish hammer pattern in the display. The only difference is that the short green body has a long upper wick. It is usually placed at the bottom of a downward trend and indicates buying pressure followed by selling pressure. The inverse hammer suggests that buyers will soon have control over the stock market candlestick patterns.
• Bullish engulfing pattern – It is formed with two candlesticks, where the second one engulfs the first candle in the opposite direction. The first candle is short red, and the one which engulfs is large green. This trend indicates a bullish market, which pushes the price up despite a downward trend the previous day.
• Piercing line pattern – Also known as a two-candle pattern, it indicates a reverse signal after a downward trend. This pattern depicts two long candles; The first is red, and the other is green. The closing price of the second candle is more than halfway up the body of the first candle, indicating intense buying pressure.
• Morning star pattern – It is a three-stick pattern depicting a short red stick between a long red and long green stick. There is no overlap among the three sticks. This candle pattern indicates a decrease in the selling pressure and the start of a bull market.
• Three white soldiers pattern – Three consecutive green candles with small wicks represent this pattern. These candles open and close progressively higher than the previous day. After a downtrend, this candlestick formation strongly indicates an upcoming bullish trend.

Bearish patterns – The bearish stock candlestick patterns create intense selling pressure for investors in the market due to a price decrease assumption. Here closing price of the stock for that period is lower than the opening price, and a red candle represents it. Below are the different types of bearish patterns.

• Hanging man pattern – It is represented by a short red candle with a long lower wick at the top of an upward trend. The hanging man pattern represents an entry of selling interest in the market. Here bears gain control of the market.
• Shooting star pattern – Like the hanging man, the shooting star is also at the top of an upward trend. But here, the short red candle has a long upper wick. Here, the market opens higher than the previous day and rallies a bit before crashing like a shooting star.
• Bearish engulfing pattern – It occurs at the end of an uptrend and is formed with two candlesticks. The first candle, with a small green body, is engulfed by a long red candle. This pattern is evidence of a slowdown in price movement. The lower the second candle, the more significant the trend is likely to be.
• Evening star pattern – Similar to the bullish morning star, it is a three-candlestick pattern, formed with a short green candle sandwiched between a long green and long red candle. The evening star pattern indicates the reversal of an upward trend.
• Three black crows – Out of all the basic candlestick patterns, this is a three-candle pattern having three consecutive red sticks with short wicks. These candles open and close lower than the previous day. Three black crows pattern is an indication of an upcoming bear market.
• Dark cloud cover – It is a two-candlestick pattern comprising a red candle that opens above the previous day’s green candle and closes below its midpoint. Candlestick trading with the dark cloud cover pattern indicates a sharp price decline, signaling that bears have taken over the session.

Stock market candlestick – Continuation candle patterns

When a candlestick pattern does not change the market direction, it is called a continuation pattern. To identify a rest period, traders need to have a deep candle chart analysis. The continuation patterns indicate a neutral price movement in the stock market. There are four types of continuation candle patterns, namely –

• Doji – When the market’s opening and closing are almost at the same point, they form a Doji pattern. Both the green and red candlesticks resemble a plus sign with varying lengths of wicks and a short body. This pattern indicates a tough fight between buyers and sellers, resulting in no gain for either side.
• Spinning top – This pattern shows rest in the market. It offers red and green candles with short centered bodies between wicks of equal lengths. The spinning top pattern indicates that the bulls sent the price higher, but bears pushed it down again, resulting in indecision in the market.
• Falling three methods – This method predicts the continuation of a bearish trend depicting a long red body followed by three short green bodies and another long red body. All the green candles are placed between the red bodies indicating a low strength in bulls to reverse the trend.
• Rising three methods – This method predicts the continuation of a bullish trend with three short red bodies sandwiched between long green bodies on either side. The reds are contained within the green bodies and depict buyers retaining market control.

Do candlestick patterns work?

Understanding candlesticks effectively requires keen attention to the market’s rules and regulations. Traders worldwide consider candlestick analysis as a primary means of identifying the stock market’s direction. However, for efficiency in trading candlestick patterns, you need to take advice from the best candlesticks patterns expert and active participation in the daily candle movements.

Reading candlestick patterns has been a popular strategy used in the stock market for several years. It works for the same reason as other daily or weekly technical analysis forms. Even the top SEBI-certified research analysts, like Ashutosh Bhardwaj, believe that SEBI research analysis on Nifty, Bank Nifty analysis, and other different stock market arenas derives the most profitable results.

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