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Candlestick Pattern Basics


Candlestick Pattern Basics

Candlestick Pattern Basics Overview :

Candlestick can be said as the graphical version of the change in the price of a particular stock/ asset in a given timeframe. They are composed of financial instruments' opening, high, low, and closing prices. There is a rectangular body known as a real body that can be hollow or filled. This rectangle body area can be long or short, depending on the proportion of lines above or below.


One of the major assumptions in the technical analysis of the stock market can be said that history repeats itself. Candlestick patterns are heavily dependent on this assumption.

Let us assume, on 4 June the price of an asset is falling, on the next day it falls but comparatively low, and the same happens on a later day, so we all can assume that on the 7 June, the price may rise, as it has seen many downfalls.


Let us assume you see the same pattern after a few months; will you not assume the same results based on your previous experience. Of course, other factors remain constant.

We tend to expect and believe the same outcome as the previous one based on experience.


Candlestick patterns in stock market

Analysts in the stock market use the Candlestick patterns to define the trading pattern and make a trade. The analyst may use one Candlestick or many, and they are kept in a certain sequence to extract useful information. Sometimes, even a single Candlestick can draw a lot of information.

Candlestick patterns in stock market can be classified into two major categories:

  1. Single Candlestick Patterns

  2. Multiple Candlestick Patterns

These patterns are further classified into various categories. We will see all of them one by one:

Single Candlestick patterns include sub-patterns such as:

  1. Marubozu - (Bullish and Bearish)

  2. Doji

  3. Spinning tops

  4. Paper umbrella (Hammer and Hanging man)

  5. Shooting star.


Multiple Candlestick patterns are formed by plotting or sequencing more than one candle in a series and drawing conclusions.

  1. Engulfing Pattern (Bullish and Bearish)

  2. Harami (Bullish and Bearish)

  3. Piercing Pattern

  4. Dark Cloud Cover

  5. Morning star

  6. Evening star

Candlestick patterns in share market provide a complete analysis to the trader as it gives out the details regarding entry, trade area, and stop loss.

Let us understand every Candlestick Pattern Screener India.


Marubozu : Marubozu is the Japanese version of the Candlestick pattern used by technical analysts to draw a conclusion about the trade. When the opening price of the asset is equal to the high of that day, it is called the Bearish market, and when the opening price is equal to the low of that day, it is called the Bullish Market.


Doji: Doji defines a specific session in the stock market trends. In these sessions, both opening and closing are equal to each other. Doji Candlesticks appear like a cross, inverted cross, or a plus sign. A Doji pattern reveals a neutral pattern found in many other important patterns. In the Japanese Language, Doji means " a Mistake or a blunder." We can relate to these patterns as the opening and closing prices are virtually the same, which originally cannot be!


Spinning top: In the Spinning Top Candlestick Pattern, the real body is very short, placed vertically between the long upper and lower shadows. It reveals the future direction of the asset. let us explain in simple terms as the buyer is pushing the price up, and the seller is pushing the price down in a given time frame. In such a situation, the closing price ends up very much near to open, So neither buyer nor seller gets any benefit by such trade as the opening and closing prices are together.


Paper umbrella (Hammer and Hanging man): Paper Umbrella is a very common pattern observed in single Candlestick patterns. Based on the pattern the direction seen on the chart, the traders interpret the meaning. It appears as a lower shadow and a small upper body.


A Candle having the length of the shadow twice the length of the actual body is referred to as the Paper Umbrella pattern. This pattern is also known as a shadow to real body ratio.


Hammer Formation: The Hammer Pattern is a bullish type of Single Candlestick pattern found in the price chart of the stock market. It appears like a hammer, as it has a small real body and a long lower shadow. It has no upper shadow. The Technical analyst says that the lower shadow should be twice bigger than the real body, and it should be located at the upper end of a trading range; only then it is known as hammer formation.


Hanging Man: The hanging man pattern is a bearish pattern found in single Candlestick charts of the stock market. having lower shadow and a small real body on the top. It may or may not have the upper shadow. The Technical analyst says that the lower shadow should be twice bigger than the real body, and it should be located at the upper end of the trading range; only then it is known as Hanging man.


Shooting star: A shooting star pattern is a of bearish type Candlestick having an upper shadow and no lower shadow, with a small real body. It reflects after an uptrend. The Shooting star can be said, when the assists open, grows high, and then suddenly fall where it began.


All above were the types of patterns visible in a single Candlestick type chart. We shall not see the multiple Candlestick patterns in the price chart.


Engulfing Pattern: Engulfing candles signal a reversal in the current trend of the market. This pattern includes two candles, in which the latter one engulf the entire body of its previous one. In simple terms, the latter one real body completely covers the previous one's real body. It can be bearish and bullish depending upon where they are forming on the price chart.


Harami Pattern: Again, it is a Japanese Candlestick pattern, made up of 2 Candlesticks. It either describes a potential reversal or continuation in the current market. The Harami chart looks similar to a pregnant girl. The word is derived from Japanese, which means Pregnant.


Piercing Pattern: It is a two-day Candlestick pattern that builds up potential short-term reversal from a downwards moving trend to an upward trend. The piercing pattern includes the first day opening near the high and closing near the low with a good trading range.


Dark Cloud Cover: Dark cloud Cover is formed by two candles, the first Bullish candle of day one and the Bearish Candle of Day 2. This pattern occurs when a bearish candle of day 2 Closes below the middle of day one bullish candle.


Morning star: A morning star can be seen consisting of 3 Candlesticks and represents the bullish signs by a technical analyst. A Morning star starts forming at a downward trend and follows to a start of an upward climb.


Evening star: The evening star pattern is a Candlestick that appears on the endpoint of the uptrend and signals that the downtrend will begin from this point onwards. We can say it is completely the opposite of Morning star.


Summary

We hope all these Candlestick patterns will help you understand the trend in the price chart of an asset and ultimately help you reach a successful trade.

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