Types of Candlestick Patterns

Candlestick patterns are a crucial aspect of technical analysis in the Stock Market. Understanding the types of candlestick patterns can significantly enhance a trader’s ability to predict future price movements. This guide will explore different types of candlesticks, their characteristics, and how they can be used effectively in online share trading.

Topics Covered :

• What are Candlestick Patterns?
• Types of Candlestick Patterns
• Conclusion

What are Candlestick Patterns?

Candlestick patterns are graphical representations of price movements in a security over a specific period. Each candlestick shows the opening, closing, high, and low prices for the period, and the shape of the candlestick can provide insights into market sentiment.

Candlestick charts were developed in Japan over 100 years before the West developed bar and point-and-figure charts. They are now widely used by traders worldwide.

Candlesticks comprise a body and two wicks (shadows or tails). The body represents the difference between the opening and closing prices, while the wicks show the high and low prices. A filled (or red) candlestick indicates that the closing price was lower than the opening price, while a hollow (or green) candlestick shows that the closing price was higher than the opening price.

Types of Candlestick Patterns

Understanding the types of candlestick patterns is essential for making informed trading decisions in online share trading. Here are some of the most common candlestick types:

Bullish Engulfing

A bullish engulfing pattern is one of technical analysis’s most reliable reversal patterns. This pattern occurs when a small red candlestick is followed by a larger green candlestick that completely engulfs the red one. The green candlestick’s body fully covers the red candlestick’s body, indicating a strong shift in market sentiment.

This pattern typically signals a potential reversal from a downtrend to an uptrend. The larger the green candlestick, the stronger the bullish signal. Traders often look for this pattern to identify buying opportunities, especially when they appear after a significant price decline. The bullish engulfing pattern indicates buyers have gained control over the market, increasing prices and signalling a potential shift in market sentiment.

For example, if a stock has been in a downtrend and the bullish engulfing pattern appears, it suggests that the downtrend may be ending and an uptrend might be starting.

The strength of this signal is amplified if the green candlestick has a high trading volume, which indicates strong buying interest. In online share trading, recognising a bullish engulfing pattern can help traders make timely entry decisions and capitalise on potential upward price movements.

Doji

A doji candlestick is characterised by its very small body, indicating that the opening and closing prices are nearly equal. This pattern suggests indecision in the market, as neither buyers or sellers have control. A Doji can signal a potential reversal, especially when it appears after a strong price move.

There are different types of doji patterns, including the common doji, the long-legged doji, the dragonfly doji, and the gravestone doji, each with unique implications:

• Common Doji: Indicates general indecision and can appear in both uptrends and downtrends. Traders should look for confirmation from subsequent candles before acting.

• Long-legged Doji: This type has long wicks on both ends, showing significant volatility within the period but ultimately closing near the open. It suggests a fierce battle between buyers and sellers.

• Dragonfly Doji: Forms when the open, high, and close are equal, with a long lower wick. This pattern suggests a potential bullish reversal if it appears after a downtrend.

• Gravestone Doji: Forms when the open, low, and close are equal, with a long upper wick. It indicates a potential bearish reversal if it appears after an uptrend.

The presence of a doji indicates that market participants are uncertain, and this hesitation can lead to a change in the current trend. In online share trading, Doji patterns are useful for identifying potential turning points. Traders often wait for the next candlestick to confirm the direction of the trend before making trading decisions.

Hammer

A hammer candlestick pattern with a small body and a long lower wick. It indicates that prices fell significantly during the period but recovered to close near the opening price. This pattern suggests that buyers are stepping in to support the price, making it a bullish reversal signal when it appears after a downtrend.

The key features of a hammer include:

• Small Real Body: Positioned at the upper end of the trading range.

• Long Lower Wick: At least twice the length of the real body, indicating significant selling pressure followed by strong buying.

The longer the lower wick, the stronger the signal. The hammer pattern shows sellers pushed the price down during the session, but strong buying pressure brought it back up, signalling a potential reversal. For those using a demat account online, recognising hammer patterns can be key to identifying buying opportunities.

Traders often look for additional confirmation before acting on a hammer pattern. This confirmation might come as a higher open or close in the next trading period. The hammer’s significance is amplified if it appears after a prolonged downtrend, particularly in areas of previous support levels.
The volume of trading during the hammer formation can also provide clues about the strength of the potential reversal, with higher volumes indicating a stronger likelihood of a trend change.

Dark Cloud Cover

The dark cloud cover pattern is one of the most telling bearish reversal signals in types of candle trading. It consists of a green candlestick followed by a red candlestick that opens above the previous high but closes below the midpoint of the green candlestick. This pattern indicates a potential bearish reversal, as sellers have taken control after a period of buying.

The key characteristics of the dark cloud cover pattern include:

• Green Candlestick: This indicates the presence of strong buying pressure.

• Red Candlestick: This opens above the high of the green candlestick but closes below the midpoint of the green candlestick.

The dark cloud cover pattern signals that the market’s upward momentum is weakening, and sellers are beginning to dominate, making it a crucial pattern for traders to watch in online share trading. Confirm this pattern with subsequent price action. A confirming indicator could be a lower opening on the next trading day or increased selling volume.

For example, suppose a stock has been in a strong uptrend and suddenly forms a dark cloud cover pattern. This indicates that despite the initial bullish sentiment, sellers are stepping in with enough force to push the prices down, potentially signalling the end of the uptrend and the beginning of a downtrend.

Traders should consider this pattern a warning sign and look for additional bearish signals to confirm the reversal before making trading decisions.

Evening Star

The evening star pattern is a classic bearish reversal pattern in types of candle trading. It consists of three candlesticks:

• A large green candlestick

• A small-bodied candlestick (either red or green)

• A large red candlestick

The evening star pattern often marks the end of an uptrend and the beginning of a downtrend.

The components of the evening star pattern are:

• Large Green Candlestick: Indicates strong buying pressure and continuation of the uptrend.

• Small-Bodied Candlestick: This candlestick can be red or green and shows indecision in the market, where neither buyers or sellers are in control.

• Large Red Candlestick: Confirms the bearish reversal by closing well below the midpoint of the first green candlestick.

The evening star pattern signifies that after a period of strong upward movement, the market has become uncertain, and the emergence of a large red candlestick indicates that sellers are taking control. Traders should look for this pattern at the top of an uptrend to identify potential selling opportunities.

For instance, consider a scenario where a stock has been rising steadily, and then an evening star pattern forms. The initial green candlestick shows the continued bullish sentiment, but the small-bodied candlestick indicates buyer hesitation.

The subsequent large red candlestick confirms the shift in control to the sellers, suggesting that the uptrend might be over. Traders should watch for additional bearish indicators and volume confirmation to solidify their decision to sell or short the stock.

Hanging Man

The hanging man is a significant bearish reversal pattern in candle trading, similar to the hammer. It appears at the top of an uptrend and signals a potential bearish reversal. It is characterised by a small body and a long lower wick.

The long lower wick indicates that prices fell significantly during the period but recovered to close near the opening price.

Key features of the hanging man pattern include:

• Small Real Body: Positioned at the upper end of the trading range.

• Long Lower Wick: At least twice the length of the real body, indicating significant selling pressure during the session.

The hanging man pattern suggests that despite a recovery during the session, the selling pressure is strong enough to potentially reverse the uptrend. The long lower wick shows that sellers could push prices down significantly, even though buyers managed to bring the price back up near the open.

Even though the buyers were able to push the price back up, the significant downward movement during the session suggests that sellers are starting to gain strength. Traders should be cautious and look for confirmation of a trend reversal, such as a lower open on the next trading day or increased selling volume, before taking action.

Morning Star

The morning star pattern is a bullish reversal pattern that consists of three candlesticks:

• A large red candlestick

• A small-bodied candlestick (either red or green)

• A large green candlestick

The small candlestick indicates indecision, and the large green candlestick confirms the bullish reversal. This pattern often marks the end of a downtrend and the beginning of an uptrend. The morning star is a reliable indicator for traders looking to enter long positions after a downtrend.

Body Piercing

The body piercing pattern is a powerful bullish reversal signal in technical analysis, characterised by two consecutive candlesticks. The pattern occurs when a green candlestick follows a red candlestick. The key features that define this pattern include:

• First Candlestick (Red): This indicates a continuation of the downtrend, showing that selling pressure was strong enough to push the prices down.

• Second Candlestick (Green): This opens below the previous low, indicating a continuation of bearish sentiment at the start of the period. However, it closes above the midpoint of the red candlestick, signalling a shift in momentum from sellers to buyers.

The body piercing pattern is significant because it suggests that buyers have regained control after a period of selling pressure. This shift often marks the end of a downtrend and the beginning of an uptrend. Identifying this pattern for traders engaged in online share trading can provide a timely entry point for long positions.

To identify the body piercing pattern, traders look for the first candlestick to be red, indicating a strong bearish sentiment. The second candlestick must open below the previous session’s low, initially suggesting a continuation of the downtrend.

However, as the session progresses, buying interest increases, pushing the price to close above the midpoint of the red candlestick. This reversal from opening lower to closing higher shows a significant change in market sentiment.

Spinning Top

A spinning top candlestick has a small body and long wicks on both ends, indicating indecision in the market. This pattern suggests that neither buyers or sellers have control, and it can signal a potential reversal or continuation depending on the context of the price action.

Traders should seek confirmation from subsequent candles before acting on a spinning top pattern. Spinning tops are important in online share trading as they highlight market indecision and potential future volatility.

Additionally Read: Demat Account Definition

Three Black Crows

The three black crow patterns consist of three consecutive red candlesticks with long bodies and short or no wicks. This pattern indicates strong selling pressure and a potential bearish reversal.

Confirming this pattern with subsequent price action is important, as it can sometimes appear during a temporary pullback in an uptrend. The three black crows pattern signals a shift from bullish to bearish sentiment, making it a critical pattern for traders to recognise.

Three White Soldiers

The three white soldiers pattern consists of three consecutive green candlesticks with long bodies and short or no wicks. This pattern indicates strong buying pressure and a potential bullish reversal. It shows a strong shift from bearish to bullish sentiment, giving traders a reliable signal to consider buying.

Rising Three Methods

The rising three methods pattern is a bullish continuation pattern consisting of a long green candlestick, three small red candlesticks, and another long green candlestick.

This pattern suggests that the uptrend will continue, as the small red candlesticks represent a temporary pullback followed by renewed buying pressure. Traders can use this pattern to confirm that the prevailing uptrend is still in place.

Bearish Harami

The bearish harami pattern occurs when a large green candlestick is followed by a small red candlestick that is entirely within the body of the green candlestick. This pattern suggests a potential bearish reversal, as the small red candlestick indicates that the buying pressure is weakening. The bearish harami pattern signals that the market’s upward momentum is slowing, making it a key pattern to watch for potential short opportunities.

White Marubozu

A white marubozu is a long green candlestick with no wicks, indicating that the price opened at the low and closed at the high of the period. This pattern suggests strong buying pressure and can signal a continuation of the uptrend.

The absence of wicks indicates no hesitation among buyers during the period. The white marubozu is a strong bullish signal, showing buyers were in control throughout the trading session.

Three Inside Up

The three-inside-up pattern is a bullish reversal pattern consisting of a large red candlestick, a small green candlestick entirely within the body of the red candlestick, and a third large green candlestick.

This pattern suggests that the downtrend is weakening, and buyers are starting to take control. The three inside-up patterns are reliable signals for traders looking to enter long positions after a downtrend.

Bullish Harami

The bullish harami pattern occurs when a large red candlestick is followed by a small green candlestick that is entirely within the body of the red candlestick. This pattern suggests a potential bullish reversal, as the small green candlestick indicates that the selling pressure is weakening.

The bullish harami pattern shows that the market’s downward momentum is slowing, making it a key pattern to watch for potential buying opportunities.

Tweezer Bottom

The tweezer bottom pattern occurs when two candlesticks have the same low, indicating strong support at that level. The first candlestick is red, followed by a green candlestick.

This pattern suggests a potential bullish reversal as the support level holds and buyers step in. It is important to confirm this pattern with subsequent price action. The tweezer bottom pattern highlights strong buying interest at a specific price level, making it a reliable signal for traders.

Inverted Hammer

The inverted hammer is a candlestick with a small body and a long upper wick. It indicates that prices rose significantly during the period but fell back to close near the opening price. This pattern suggests buyers start stepping in after a downtrend, making it a potential bullish reversal signal.

The longer the upper wick, the stronger the signal. The inverted hammer pattern shows that buying interest is returning, signalling a potential reversal in the current downtrend.

On Neck Pattern

The on-neck pattern is a bearish continuation pattern that consists of a long red candlestick followed by a small green candlestick that closes near the low of the red candlestick. This pattern suggests that the downtrend is likely to continue, as the small green candlestick represents a temporary pause in the selling pressure.

The on-neck pattern is important for traders to identify as it confirms the continuation of the prevailing downtrend.

Double Candlestick Patterns

Double candlestick patterns consist of two candlesticks forming a pattern indicating potential price movement. Examples include bullish and bearish engulfing patterns, tweezers, and haramis.

These patterns provide more detailed insights into market sentiment and can be used to confirm other technical indicators. Recognising double candlestick patterns can enhance a trader’s ability to predict market movements accurately.

Conclusion

Each type of candlestick pattern plays a crucial role in helping traders and investors make informed decisions. By combining various techniques, traders can develop robust trading strategies for different market conditions.

Opening a demat account online allows traders to access these tools and apply them effectively in online share trading, enhancing their trading skills and investment outcomes.