Candlestick Chart Pattern Types & it's Meaning | Espresso

Candlestick Pattern – A Quick Guide

Candlestick pattern is a commonly used technical analysis tool in intraday stock trading. The pattern offers a collective visual depiction of the size of price fluctuations. Traders use the candlestick pattern to identify price patterns and depict the near-future direction of the stock price.

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If you want to use the candlestick pattern, here is a quick guide for your use.

What is a Candlestick Pattern?

A candlestick pattern is a type of technical analysis that displays information about the stock price movement. Candlestick charts help traders interpret price information and understand the future stock price movement, enabling informed decision making.
Also Read: What is Long Wick Candlestick Trading?

Each candle has three parts:

  • Upper shadow or wick
  • Body
  • Lower shadow or wick

The body of the candle is green or red. Each candle has four points of data:

  • Open: The first trade of the period
  • High: the highest price traded in the period
  • Low: The lowest traded price in the period
  • Close: The last trade of the period

How to Read a Candlestick Pattern?

<We suggest adding a few reference images for better understanding.>

Real Body: In the candlestick pattern, the candle body represents the difference between the opening and closing price of the security traded during the period. This helps the traders assess the price range of the particular stock for the concerned period.

Open price:

  • The top or bottom of the candlestick is a representation of the opening price.
  • In case the opening price is greater than the closing price, you will see the open at the top of the body of the candlestick.
  • This represents that the prices reflected a downtrend, and the body will be either red or black.
  • In case the opening price is lesser than the closing price, you will see the open at the bottom of the body of the candlestick.
  • This represents that the prices reflected an uptrend, and the body will be either green or white.

Close price:

  • The closing price can be at the top or bottom of the candlestick body.
  • In case the closing price is greater than the opening price, you will see the close at the top of the body of the candlestick.
  • This represents that the prices reflected an uptrend, and the body will be either green or white.
  • In case the closing price is lesser than the opening price, you will see the close at the bottom of the body of the candlestick.
  • This represents that the prices reflected a downtrend, and the body will be either red or black.

Shadows:

The vertical lines above and below the candle are known as wicks or shadows. These wicks help understand the high and low of the traded stock price. For example, If the upper wick on the red candle is short, it means the stock price opened near to the high price of the day. Alternatively, if the upper wick on the green candle is short, it means the stock price closed near the high of the day.

Traders use this relationship of stock price to understand the market sentiment and depict the future price movements.

Assumptions While Analysing Candlesticks Charts

Here are the assumptions while analysing candlestick charts:

  • Be flexible with patterns

It is possible that the candlestick pattern may show minor variations due to the market conditions. Therefore, do not jump to conclusions and instead keep a flexible mindset while analysing a candlestick chart.

  • Look for a previous trend

If you are looking for a bearish candlestick pattern, keep in mind that the previous pattern should have been a bullish one, and likewise, a bearish pattern should be the former pattern when looking for a bullish pattern.

  • Buy strong and sell weak

On a candlestick chart, strength or a bullish trend is signified by a green candle, while weakness or a bearish trend is indicated by a red candle. This means that you should sell as you see a red candle and buy when you see a green candle.

What are the Types of Candlestick Patterns?

Traders must compare different candlesticks (preceding and next candles) to get a holistic picture of the future stock price movements. Essentially, all candlestick patterns can be categorised as:

Bullish candlestick patterns

  • Hammer:Short body and a long lower shadow, usually located at the bottom of a downward price trend, indicating that buyers kept the price up.
  • Inverse hammer:Short body and a long upper shadow, located at the bottom of a downward trend, indicating buying pressure and control of buyers in the near term.
  • Engulfing: Ashort red candle is engulfed by a large green candle, indicating that the price opened lower than the previous day, but the market is pushing the price up.
  • Piercing line:Long red candle followed by a long green candle, where the second bar is more than half of the first candle.

Bearish candlestick patterns

  • Hanging man: Short body and long lower shadow, usually located at the top of an upward trend, indicating a selling pressure with bears in control.
  • Shooting star: Short body and long upper wick at the top of the trend. The price opens higher than the previous day but rallies before crashing like a shooting star, indicating selling pressure.
  • Engulfing: Short green candle engulfed by a long red candle, indicating a market slowdown and an upcoming price fall.
  • Even star:One short candle between one long red and one long green candle, indicating a reversal of an upward trend.

To Conclude

Traders can use candlestick patterns to get in-depth price readings and make informed trading decisions. However, these patterns can be complicated to understand, and you can engage with a professional stock broker for stock trading.

 

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Frequently Asked Questions

Candlestick patterns are widely used by traders, but their reversal and continuation price signals are not 100% reliable in the modern electronic trading market.

A green candle means the opening price on the day was less than the closing price – a price rise. A red candle means the opening price was higher than the closing price on the day – a price fall.

A hammer candlestick pattern forms when a security trades much lower than its opening price but rallies a little to close near the opening price.