Candlestick Patterns: What is it & How to Read Candlestick Charts?

Veteran traders can predict price movements accurately. You can learn this skill too. Mastering Japanese candlestick patterns can help. It's a powerful tool that has been in use for centuries. In this article, we will discuss candlestick patterns, explain their significance and show you the most common ones. Also Read: Motivational Quotes Stock Market

Japanese candlesticks show how prices change in financial markets. When multiple candlesticks are together, they create patterns on a price chart that traders can use to analyse market behaviour. The candlesticks show the open, close, high, and low prices of an asset over a specific period. Traders use this information to predict future price movements.

Here are the key components of a candlestick chart:

Body:

The rectangular area between the open and close prices. A green fill in the body indicates a price closed higher than its open. Similarly, a red fill indicates a closing price lower than its open.

Wick (or Shadow):

These thin lines extend above and below the body. They represent the high and low prices during the period.

Upper Wick:

The upper shadow, extending above the body, signifies the high price reached during the timeframe.

Lower Wick:

The lower shadow, extending below the body, represents the low price achieved during the timeframe.

• Learn the basic components of a candlestick and understand the signals projected by major candlestick patterns.
• Get your timeframes right. Candlestick charts can be plotted for various timeframes, such as daily, hourly, or minute-by-minute. Choose a timeframe depending on your requirements. For instance, an intraday trader might look at lower timeframes, such as hourly charts, the 4-hour chart, or even the minute-minute chart, to make trades. On the other hand, an investor might look at the daily chart to ascertain the market.
• Identify trends by looking at sequences of candlesticks. An uptrend typically consists of higher highs and higher lows, while a downtrend has lower highs and lower lows. Pay attention to the length and colour of the candlesticks within a trend to gauge their strength and momentum.
• Look for key support and resistance levels on the chart. These are price levels where the trend is likely to encounter obstacles. Candlestick patterns near support or resistance levels can provide valuable insights into future price action.
• Always analyse trading volume along with candlestick patterns. High volume can confirm the significance of a price move, while low volume might indicate a lack of conviction.

Candlesticks convey essential information regarding an underlying asset's opening, high, low, and closing prices (OHLC). Candlestick patterns can be classified into two categories - single candlestick patterns which present information through a single candlestick, and multiple candlestick patterns which present information through a series of candlesticks.

Single Candlestick Pattern

Analysing single candlestick patterns with other market signals, such as volume and overall trend, can provide powerful trading signals.

3 Bearish Single Candlestick Patterns

Here are some key bearish single candlestick patterns you should know:

• Bearish Engulfing Pattern: After an uptrend, a small bullish candle is followed by a larger bearish candle that engulfs it, indicating a potential shift from bullish to bearish sentiment.
• Shooting Star: After an uptrend, a small-bodied candle with a long upper wick suggests that bears may be gaining control.
• Dark Cloud Cover: After an uptrend, a bullish candle is followed by a bearish candle that opens higher than the previous close but closes below the midpoint of the previous bullish candle. This indicates a potential reversal to bearish sentiment.

3 Bullish Single Candlestick Patterns

These candlestick patterns typically appear when the market is at the end of a downturn.

• Harami: The bullish Harami pattern consists of two candlesticks. The first candlestick is a larger one, which typically represents the ongoing trend. The second candlestick is smaller and appears within the range of the first candle, suggesting that the current trend is weakening.
• Marubozu: The bullish Marubozu is a single candlestick pattern characterised by a long green (or white) body without shadows or with very short shadows. The absence of shadows indicates that the opening price was the day’s low and the closing price was the day’s high. This pattern signifies strong buying pressure throughout the trading session, indicating that buyers were in control from the opening to the closing bell.
• Hammer: The hammer is a single candlestick pattern with a small body (green or red) situated at the upper end of the candle, with a long lower shadow and little or no upper shadow.

The long lower shadow suggests that sellers pushed prices lower during the session, but buyers could push the price back up to close near the opening price. This pattern indicates a potential reversal of a downtrend, signalling that the bulls are gaining control. Also Read: Bull Market vs Bear Market - Know the Difference

Multiple Candlestick Patterns

As the name suggests, multiple candlestick patterns combine two or more candlesticks that offer deeper insights into market dynamics. For example, a Doji, followed by a bullish engulfing pattern, may indicate a potential recovery.

3 Bullish Multiple Candlestick Patterns

• Morning Star: This pattern consists of three candles - a bearish candle, a small Doji or spinning top indicating indecision, and a bullish candle. It suggests a reversal from bearish to bullish sentiment.
• Bullish Three White Soldiers: This pattern features three consecutive bullish candles with higher closes. It signifies a strong uptrend and potential further bullish movement.
• Bullish Kicker: A bullish kicker pattern occurs when a significant gap exists between two consecutive candlesticks. The first candle is bearish, followed by a large bullish candle that gaps up from the previous close.

3 Bearish Multiple Candlestick Patterns

• Evening Star: Similar to the morning star, this pattern comprises three candles - a bullish candle, a small doji or spinning top indicating indecision, and a bearish candle. It suggests a reversal from bullish to bearish sentiment.
• Bearish Three Black Crows: This pattern features three consecutive bearish candles with lower closes. It signifies a strong downward pressure period followed by additional bearish candles.
• Bearish Kicker: A bearish kicker pattern occurs when there is a significant gap down between two consecutive candlesticks. The first candle is bullish, followed by a large bearish candle that gaps down from the previous close. It suggests a sudden shift in market sentiment towards bearishness.

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Learning to read Japanese candlestick patterns is a valuable skill for traders. These small, rectangular shapes can provide insights into market sentiment and price action. Understanding this is important for analysing and predicting price movements. Researching other common candlestick patterns is important to navigate market fluctuations better. This guide is just the beginning of your trading journey. Also Read: Best Personal Finance Books That are a Must Read