Candlestick charts were first employed by Japanese rice dealers in the 17th century, but traders and investors use them today to trade stocks all around the world.
The first thing you should learn when starting a trading career is how to use candlestick charts.
Technical analysts employ candlestick price charts, which show a security's opening, high, low, and closing prices over a given time frame. Such a graphic is incredibly enlightening and visually beautiful. It shows how market participants have behaved in the past and now. For this reason, the majority of traders worldwide utilize it.
What is Candlestick Pattern?
Candlestick patterns are created by arranging two or more candles in a specific order, or by a single candle. These candlestick patterns are used by traders to find trading opportunities because they make it easier for them to analyze the price movement of a securities in the past and present and detect trend reversals or continuations.
Studying candlestick patterns is crucial because they show what buyers and sellers are doing.
Candles can be of two types - Bullish or Bearish
Bullish Candle -
A candle is referred to as bullish when its close price exceeds its opening price. Such a candle has a green or white color filling in the center.
Such a candle represents optimism and suggests that there is a good chance the security's price will rise even higher.
Bearish Candle -
A candle is referred to as bearish when its close price is less than its opening price. Such candles have a black or crimson hue filled in the center.
Such a candle represents unfavorable sentiment and suggests that the security's price will probably drop even more.
Types of Candlestick Patterns :
Candlestick designs can be categorized into three groups based on the quantity of candles in the patterns:
1. Single Candlestick Patterns
2. Two Candlestick Patterns
3. Three Candlestick Patterns
In this blog, we will exclusively delve into the intricacies of Single Candlestick Patterns.
Single Candlestick Patterns
These designs are created by a solitary candle, as the name suggests.
Popular Single Candlesticks Patterns include -
1. Bullish Marubozu
2. Bearish Marubozu
3. Hammer
4. Hanging Man
5. Inverted Hammer
6. Shooting star
7. Doji
Bullish Marubozu Pattern -
Technical analysis uses the bullish Marubozu single candlestick pattern to forecast bullishness.
In Japanese, the word Marubozu means "bald." A bullish marubozu candle is essentially a long, green or white candle with little to no shade on either the upper or lower portion.
It happens when the high and low are nearly equal to the open and close, respectively. It is regarded as a very potent indication of bullishness.
Bearish Marubozu Pattern -
Negative Technical analysis uses the Marubozu single candlestick pattern to forecast bearishness.
negative Marubozu is essentially a lengthy, bearish, red or black candle with little to no shade on either the upper or lower surface.
It happens when the low is nearly equal to the close and the high is nearly equal to the open. It is regarded as a very potent indication of pessimism.
Hammer Pattern -
This candlestick pattern forms near the bottom of a downtrend and is characterized by a short body candle with little to no upper shadow and a long lower shadow. This candlestick pattern indicates a bullish reversal.
The lowest shadow in this pattern should typically be at least twice as large as the actual body. The actual body might have either a green or red tint. However, a hammer with a green genuine body produces a more bullish signal.
Hanging Man Pattern -
A candle with a small body, little to no upper shadow, and a long lower shadow, found at the peak of an upswing, forms this particular candlestick pattern. This candlestick pattern indicates a bearish reversal.
The lowest shadow in this pattern should typically be at least twice as large as the actual body. The actual body might have either a green or red tint. However, the hanging man's crimson true body form sends forth a stronger bearish indication.
This pattern serves as a warning indication of a possible reversal to the negative.
Inverted Hammer Pattern -
The hammer pattern appears differently from this one. This candlestick pattern indicates a bullish reversal.
It is created at the bottom of a downtrend by a candle with a small body, little to no lower shadow, and a long upper shadow.
The upper shadow in this design should typically be at least twice as large as the actual body. The actual body might have either a green or red tint. However, an inverted hammer with a green genuine body produces a more bullish signal.
This pattern shows that buyers are driving up the price and suggesting an upward trend reversal.
Shooting Star Pattern -
The hanging man pattern is reversed in appearance by this motif. This candlestick pattern indicates a bearish reversal.
It is created by a candle that is found near the peak of an uptrend and has a small body with little to no lower shadow and a long upper shadow.
The upper shadow in this design should typically be at least twice as large as the actual body. The actual body might have either a green or red tint. However, a shooting star with a red actual body forms a more powerful bearish indicator.
This pattern shows that sellers are driving the price down and buyers are losing ground, signaling a reversal of the trend to the negative.
Doji Pattern -
A Doji candlestick pattern is created when the price at opening and closing are nearly equal. Both the top and lower shadows' lengths can change.
Doji show market hesitancy when buyers and sellers are equal and cause uncertainty regarding price movement.
Due to the ambiguity surrounding price movement, many traders consider doji to be significant price reversal indicators. It is important to pay close attention to the price activity that preceded the doji in order to interpret this candlestick.
For instance, if it forms at the top of an uptrend, it might push the price down, and if it forms at the bottom of a downtrend, it might push the price higher.
Types of Doji
The most fundamental doji candlestick pattern, which denotes a trend reversal, can show up at either the top or bottom of the trend. Its shape is like a plus sign or a cross.
Long Legged Doji -
Both the upper and lower shadows of this candlestick pattern are lengthy.
Dragonfly Doji -
There is no shadow at all or a very little shadow at the top of this candlestick pattern. It resembles the English letter "T" in shape. This candlestick pattern, known as a bullish reversal, suggests that an asset's price is probably going to rise even higher.
Gravestone Doji -
This design differs from the dragonfly doji in that it has a long top shadow and either none at all or a very tiny below shadow. It is a bearish reversal candlestick pattern, meaning that more declines in asset prices are probably ahead.
The Bottom Line
Single candlestick patterns, when applied sparingly and carefully, enhance analysis. On the other hand, using raw signals alone without taking extra precautions is risky. By being aware of these built-in constraints, candlesticks can be used effectively to reduce downside risks.