Candlestick Charts Explained – Trading the Patterns

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Understanding Basic Candlestick Charts

Candlestick charts originated in Japan over 100 years before the West developed the bar and point-and-figure charts. In the 1700s, a Japanese man named Homma discovered that, while there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders. 

Candlesticks show that emotion by visually representing the size of price moves with different colors. Traders use the candlesticks to make trading decisions based on regularly occurring patterns that help forecast the short-term direction of the price.

Key Takeaways

  • Candlestick charts are used by traders to determine possible price movement based on past patterns.
  • Candlesticks are useful when trading as they show four price points (open, close, high, and low) throughout the period of time the trader specifies.
  • Many algorithms are based on the same price information shown in candlestick charts.
  • Trading is often dictated by emotion, which can be read in candlestick charts.

Candlestick Components

Just like a bar chart, a daily candlestick shows the market’s open, high, low, and close price for the day. The candlestick has a wide part, which is called the “real body.”

This real body represents the price range between the open and close of that day’s trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the close was higher than the open.

Traders can alter these colors in their trading platform. For example, a down candle is often shaded red instead of black, and up candles are often shaded green instead of white.

Candlestick vs. Bar Charts

Just above and below the real body are the “shadows” or “wicks.” The shadows show the high and low prices of that day’s trading. If the upper shadow on a down candle is short, it indicates that the open that day was near the high of the day.

A short upper shadow on an up day dictates that the close was near the high. The relationship between the days open, high, low, and close determines the look of the daily candlestick. Real bodies can be long or short and black or white. Shadows can be long or short.

Bar charts and candlestick charts show the same information, just in a different way. Candlestick charts are more visual, due to the color coding of the price bars and thicker real bodies, which are better at highlighting the difference between the open and the close.

The above chart shows the same exchange-traded fund (ETF) over the same time period. The lower chart uses colored bars, while the upper uses colored candlesticks. Some traders prefer to see the thickness of the real bodies, while others prefer the clean look of bar charts.

Basic Candlestick Patterns

Candlesticks are created by up and down movements in the price. While these price movements sometimes appear random, at other times they form patterns that traders use for analysis or trading purposes. There are many candlestick patterns. Here a sampling to get you started.

Patterns are separated into bullish and bearish. Bullish patterns indicate that the price is likely to rise, while bearish patterns indicate that the price is likely to fall. No pattern works all the time, as candlestick patterns represent tendencies in price movement, not guarantees.

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Bearish Engulfing Pattern

A bearish engulfing pattern develops in an uptrend when sellers outnumber buyers. This action is reflected by a long red real body engulfing a small green real body. The pattern indicates that sellers are back in control and that the price could continue to decline.

Bullish Engulfing Pattern

An engulfing pattern on the bullish side of the market takes place when buyers outpace sellers. This is reflected in the chart by a long green real body engulfing a small red real body. With bulls having established some control, the price could head higher.

Bearish Evening Star

An evening star is a topping pattern. It is identified by the last candle in the pattern opening below the previous day’s small real body. The small real body can be either red or green. The last candle closes deep into the real body of the candle two days prior. The pattern shows a stalling of the buyers and then the sellers taking control. More selling could develop.

Bearish Harami

A bearish harami is a small real body (red) completely inside the previous day’s real body. This is not so much a pattern to act on, but it could be one to watch. The pattern shows indecision on the part of the buyers. If the price continues higher afterward, all may still be well with the uptrend, but a down candle following this pattern indicates a further slide.

Bullish Harami

The bullish harami is the opposite or the upside down bearish harami. A downtrend is in play, and a small real body (green) occurs inside the large real body (red) of the previous day. This tells the technician that the trend is pausing. If it is followed by another up day, more upside could be forthcoming.

Bearish Harami Cross

A bearish harami cross occurs in an uptrend, where an up candle is followed by a doji—the session where the candlestick has a virtually equal open and close. The doji is within the real body of the prior session. The implications are the same as the bearish harami.

Bullish Harami Cross

A bullish harami cross occurs in a downtrend, where a down candle is followed by a doji. The doji is within the real body of the prior session. The implications are the same as the bullish harami.

Let’s look at a few more patterns in black and white, which are also common colors for candlestick charts.

Bullish Rising Three

This pattern starts out with what is called a “long white day.” Then, on the second, third, and fourth trading sessions, small real bodies move the price lower, but they still stay within the price range of the long white day (day one in the pattern). The fifth and last day of the pattern is another long white day.

Even though the pattern shows us that the price is falling for three straight days, a new low is not seen, and the bull traders prepare for the next move up.

A slight variation of this pattern is when the second day gaps up slightly following the first long up day. Everything else about the pattern is the same; it just looks a little different. When that variation occurs, it’s called a “bullish mat hold.”

Bearish Falling Three

The pattern starts out with a strong down day. This is followed by three small real bodies that make upward progress but stay within the range of the first big down day. The pattern completes when the fifth day makes another large downward move. It shows that sellers are back in control and that the price could head lower.

The Bottom Line

As Japanese rice traders discovered centuries ago, investors’ emotions surrounding the trading of an asset have a major impact on that asset’s movement. Candlesticks help traders to gauge the emotions surrounding a stock, or other assets, helping them make better predictions about where that stock might be headed.

Candlestick Charting & Patterns Explained

Welcome to our new web site.
We are currently adding content to the web site so please bear with us during this “development” phase but please be sure to bookmark the site, as we will not only provide candlestick chart theory, but crucially PRACTICAL information on applying and trading using this ancient technical analysis technique.

Like the popular OHLC charts, candlestick charts also require the same open, high, low and close price data to draw them for the period you wish to display, however it is believed by many that candlestick charts help to give an easy to interpret, visual representation of the price action.

Trading With Candlestick Chart Patterns

A key to ALL candlestick chart patterns is that they must always be interpreted in context with the current market structure, not solely in isolation! I can’t stress this enough.

Too many traders get focused solely on the actual candlestick pattern that appears, however the CONTEXT is equally as important, if not more important.
There is no doubting the incredible power of candlesticks but we must not lose sight of the critical component of the context of the candle formation we are interpreting ie market structure, support/resistance, have we had an extended trending move, etc.

Below is a great example of candlestick charting in practice, however if you are unsure of how a candlestick chart is drawn please refer to our how to read a candlestick chart article.

Candlestick Patterns Explained With Examples – Ultimate Tutorial Guide for Beginners

It’s does not matter how you feel in the past, I am going to list and discuss the most commonly used 11 types of best candlestick patterns explained with examples which change your life completely. So that you never depended on any trading company or another person to execute your successful trade.

Candlestick patterns or candlestick charts are used to track the movement of stocks or companies. Nowadays it’s so easy to read candlestick charts through Kite Zerodha app and other technical analysis platforms. I explained here eleven most popular candlestick patterns with perfect examples which make you profitable in the year 2020.

Table of Contents

Candlestick Patterns Explained With Examples For Beginners

Many types of candlesticks chart or candlestick patterns work for successful traders. Actually, these patterns are the basics of stock market trading. Today I only discuss a few of them which needs a beginner to understand the basic level of technical chart analysis.

1. Doji Candlestick Patterns

Doji is a type of candlesticks who have zero or almost zero difference between its open price and close price. Doji candlestick forms may vary according to the shape & length of the shadow. 5 types of Doji Candlesticks you can be seen here, which are the most valuable soldier of a candlestick chart.

Examples of Doji Candlesticks:

Doji appears in a candlestick chart at that time when the potential of buyers and sellers approximately equal ( i.e buying pressure and selling pressure will be same ). Now the time to set up your trade, because its the time to world wors between buyer and seller. If buyers win, stock market price going to high, otherwise sellers win the war and market price will be falling gradually.
Doji Candlestick is the clear sign of trend reversal. That means if Doji appears after a bullish trend, the Bearish trend going to start very soon.

2. Hammer Candlestick Patterns

A “Hammer Candlestick” is a candlestick with a small body, a small range from open to close price with a long shadow producing below the body, and little shadow or no shadow above.

Examples of Hammer Candlesticks

Example: When a hammer appears at the bottom of a downtrend, its long with a long shadow that means an unsuccessful effort by sellers to push the price down, and a corresponding effort by buyers to step in and push the price back up quickly before the period closed. So now the time for bullish candle next and may change the trend.

3. Hanging Man Candlestick Patterns

Hanging Man candlestick shape same as hammer candlestick, but it occurred in the uptrend. The neckline shadow appears downside and the visual body is like this,

Hanging Man candlestick is the first sign of top line of the uptrend and starting the downtrend. But for the confirmation, you should wait for next Bearish candle reach the neckline shadow.

4. Shooting Star Candlestick Patterns

Shooting Star candlestick is the simple inverted symbol of hanging man candlestick. In this case, the shadow or tell appears above the candle body. It’s also called inverted Hammer.
See the example here,

as a confirmation of downtrend, wait to reach the next bearish candle to the lowest price of the shooting star candlestick.

5. Checkmate Candlestick Patterns

Checkmates occur when the trading price range is locked within a small area with a long time like the image shown below. Checkmate candlesticks pattern is the great sign of the reversal in trend.

You must use any support level or resistance level to make sure about the trend reversal direction. Look at the pictures above for better understanding.

6. Evening Star Candlestick Patterns

Evening Star candlestick is same as a doji with a small body. It appears after a long bullish candle and will be a gap up opening. Evening Star candlestick pattern consists of 3 single candles,

  1. A long bullish candle.
  2. A small-bodied bearish candle.
  3. A long bearish candle that opens at or below the low point of the Evening Star Candlestick.

Examples of Evening Star Candlesticks:

If the Shooting Star Candlesticks pattern appears after an uptrend, it is the clear indication of the reversal of the trend, that means downtrend already started.

In the above figure, we have depicted how the evening star pattern looks like. At first, the huge green candle creates on the chart that indicates huge demand for the stock and still bulls are in control. After that, a new candle or the second candle creates on the chart that opens gap up and made a very small body with shadow. This indicates indecision mode. At last third candle open gap down and it is the huge red candle closes near the middle of the first huge green candle. And it is the indication of huge supply started in stock and bears are taken the control over the bulls. Such type of pattern always creates at the upper side of stock charts and once found on charts then it is the early indication of sell-off.

7. Morning Star Candlestick Patterns

Morning Star candlestick also same as a doji with a small body. It appears after a long bearish candle and will be a gap down opening. Morning Star candlestick pattern consists of 3 single candles,

  1. A long bearish candle.
  2. A small-bodied bullish candle.
  3. A long bullish candle that opens at or higher the high point of the middle Candlestick.

Examples of Morning Star Candlesticks:

If the Morning Star Candlesticks pattern appears after an downtrend, it is the clear indication of the reversal of the trend, that means uptrend already started.

Above figure depicts how morning star looks like. When we try to interpret the pattern then we can easily see that at first a big red candle appeared on stock charts that indicate huge selling. After that stock opens gap down and makes hammer type of pattern on stock charts. If the body is small then it is considered as indecision but if looks like hammer then we can consider bulls are greatly fighting with bears to close the price near to its open price. After that, the third candlestick created on the stock chart which is again a huge candlestick of green color. It indicates that finally the bulls are in control and they making the price of the stock higher and higher. So it is the indication of the up move. So generally when downtrend ends then morning start type of structure created on a stock chart and it is the indication of reversal and after completion of pattern the stock starts to fly from the current level.

8. Bullish Engulfing Candlestick Patterns

In bullish engulfing pattern, the real body (open to close) of a bearish candlestick is encompassed by the body of next bullish candle. This indicates an increase in activity from both bears and bulls, and a shift of overall market sentiment towards uptrend.

Examples of Bullish Engulffing:

It indicates that the demand for buying is increased so after a downtrend you can take it as trend reversal.

9. Bearish Engulfing Candlestick Patterns

In this pattern, the real body (open to close) of a bullish candlestick is encompassed by the body of next bearish candle. This indicates an increase in activity from both bears and bulls, and a shift of overall market sentiment towards downtrend.

Examples of Bearish Engulfing:

It indicates that the demand for selling is increased so after a uptrend you can take it as trend reversal.

These are enough for basic knowledge!

By the way, I will discuss so many candlestick patterns in the next blog post ( in part 2 ) which works for me.
So friends, don’t forget to comment your experience about the article candlestick patterns explained with examples.

10. Three White Soldiers Candlestick Pattern

In the above figure, we have shown how three white soldiers’ candlestick pattern looks like. The pattern created at the end of the downtrend. And as we see in figure first candle is green followed by the second candle as well green followed by the third candle as well green. One other point is every next candle is opening in the body of the previous candle and closing above the high of the previous candle. ​So it is indicating that for continuously three session’s bulls are having control over the bears and demand of the stock is now increasing. So if such type of pattern created on stock chart after the downtrend then it is the indication of the up move and we can take a position in such type of stock.

11. Three Black Crows Candlestick Pattern

Above figure shows how the pattern looks like. Firstly stock moves in an uptrend after that uptrend stock started to make red huge candles. It forms three huge red candles such that the first one is the red candle and the second one opens below the open of previous candle and again the third candle will open below the second candle open.

So it is forming the bearish bars consistently. ​When we interpret it then we can understand that bears are in control and consistently making the stock to move lower. And if such type of pattern created after the uptrend then it is the indication of a reversal. So we may come out from the stock earlier by making the profit.

Candlestick Patterns Explained FAQ

Dear traders, always I love to start from the beginning and wish to provide you all the basic knowledge which help you to understand how to analyze a candlestick pattern on a candlesticks chart with examples.
Keep reading this FAQ section to better understand the behavior of candlestick pattern. I promise, after learning the whole things about candlestick patterns, your mind & eyes become like the candlestick pattern indicator.

Also Read: How to track your profit & loss with Zerodha back office.

Investors and traders can use candlestick charts like a tool to technical analysis the stock market. Candlestick patterns working as the technical tool on stock trading analysis. A single candlestick patterns or candlestick charts formed by multiple candlesticks with a specific time frame. A candlestick chart represents the overall designed with whole candlesticks within a single time frame. As an example, a 15 minutes Candlestick chart represent the arrangement of multiple 15 minutes candle organized one by one in a manner. While Candlestick Pattern represent some specific types of patterns created by a single or multiple candlesticks.

Example: Doji is a type of candlestick pattern which is made by a single candlestick. Where the morning star candlestick created by 3 piece of single candlesticks back to back arranged with a specific manner.

A candlestick helps you to know the price variation over a time period. Also the strength of buyers and sellers within that time frame. When I was a beginner, at that time I refuse to learn candlestick pattern. Because I love the simplest things every time, so I was stack with line chart first 10 days. But line chart can’t help me anymore. So I started to learn the candlestick behavior then I entered to analyze technical chart through candlestick pattern.

Without a candlestick, you fail to imagine the sentiment and behavior of other traders, investors and smart money. A candlestick helps you to set up your trade with a logical pattern. If you learn candlesticks seriously, you became a money attracting magnet.

Also Read: Best Ways to Save Money in India only Smart People Knows.

The first candlestick can define the second and the second help you to determine the third candle. This property is called continuation pattern which informs us about the probabilities of price in the future. By using this property of candle stick chart, you can imagine future by analyzing previous day chart.

Also Read: How To Use Zerodha Kite App Like A Pro

A single candlestick looks like the figure below.

candlestick open close high low

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A candlestick provides you with four pieces of information:

  1. The open price.
  2. The close price.
  3. The high price.
  4. The low price.

The color of the candlestick is also significant in understanding whether the open price was higher or lower than the close price.

  • If the candle is red this means that the open price is, lower than the close price.
  • If the candle is green this means that the open price is, higher than the close price.

Green candlestick denoted as the Bullish Candle, and a Red candlestick denoted as the Bearish Candle.

Look at the above figure here we have taken the example of the bullish candlestick. Above candlestick shows us various information of stock for particular duration.

The information like open, close, high and low for particular duration. The candlestick is green it means that it open near low and close near high. And it is therefore called a bullish candlestick.

When this type of candlestick appeared on the stock chart then it is considered as something good is happening in stock in respective duration.

Bearish Candlestick Pattern

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Now, look at the above figure. Here we have taken the example of bearish candlestick. Here the open is near high and close is near the low. It means that stock open in the upper range but closed by coming down. So we can say that in that respective duration the stock has gone from some unavoidable circumstances and hence stock falls from upper region.

When this type of candlestick forms on the stock chart then it is the indication of people are selling stock in respective duration and consider as the negative for the stock.

One more important thing is that we have called the above candlestick is formed for a particular session but we have not mentioned the duration for respective candlestick or respective session. So keep in mind if candlestick is formed for 1-day duration then open, close, high and low is for the one-day duration only.

Similarly, the same type of candlestick can be formed for one week, one-month duration as well as longer duration. So the high, low, open and close created according to respective duration.

Candlestick chart analysis can defines the future candlestick behavior, that’s true! But not perfectly. If you want to know the accurate result, you need to learn the types of the candlestick which helps you to take your trade. I am not believing with a single Japanese candlestick, so I use the combination of the candlestick which called “Japanese candlestick patterns” which helps me to indicate buy signals and sale signals according to the behavior of candlestick chart patterns already formed.

But before going to learn candlestick pattern, allow your brain to put these types of candlesticks in your mind. These are the fundamentals of a candlestick chart.

  • Read more about Japanese Candlestick Patterns from the book Japanese Candlestick Charting Techniques .

Here are the 11 types of Candlestick Patterns most commonly used by successful traders.

  • Doji Candlestick
  • Hammer Candlestick
  • Hanging Man Candlestick
  • Shooting Star Candlestick
  • Checkmate Candlestick
  • Evening Star Candlestick
  • Morning Star Candlestick
  • Bullish Engulfing Candlestick
  • Bearish Engulfing Candlestick
  • Three White Soldiers Candlestick Pattern
  • Three Black Crows Candlestick Pattern

When we start to analyze the stock then we have various methods to follow. Every person selects their respective method to select a stock. Some are fundamental analyst and some are technical analyst. But most of the methods are using stock charts. Some follow the patterns mostly appeared on stock charts.

There are various types of charts are present for analysis like line chart, bar chart, candlestick chart. Every chart has their pros and cons. We need to choose the chart type according to its features and according to our need. When we look into the line chart then it will show us only the closing prices but not the other prices like high, low, open and close. It is also called as the close only chart. So we cannot manipulate the stock by using only closing prices of stock. We need more information to manipulate the stock.

According to me, the candlestick charts are the best type of chart that will give us more information on stock charts to manipulate the stock. And these types of charts are the best charts used for trading purpose. Because a single candle can show us most of the data hidden in stock itself.

Single Candlestick Methods

  • Bullish Marubozu
  • Bearish Marubozu
  • Hammer Candlestick Pattern
  • Hanging man Candlestick Pattern

Double Candlesticks Method

  • Bullish Outside Bar Candlestick Pattern
  • Bearish Outside Bar Candlestick Pattern
  • Inside bar Candlestick Pattern

Three Candlesticks Method

  • Morning Star Pattern
  • Evening Star Pattern
  • Three White Soldiers
  • Three Black Crows

In this blog post, we have studied different methods and the patterns of candlesticks. As well we have discussed how to identify such type of patterns on the stock chart. And once we found them on the chart then how to analyze them and trade them. ​Generally, there are many more types of candlesticks patterns but here we have limited our discussion with only the most important candlestick patterns that mostly appeared on a stock chart and having success ration when traded properly.

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