What is candlestick chart pattern in stock market

Intraday trading is a method of investing in stocks where the trader buys and sells stocks on the same day without any open positions left by the end of the day. Hence, intraday traders try to either purchase a share at a low price and sell it higher or short-sell a share at a high price and buy it lower within the same day. This requires a good understanding of the market and relevant information that can help them make the right decisions. In the stock market, the price of a share is determined by its demand and supply among other factors.

Tools such as candlestick chart patterns offer great help to traders. We will talk about these Candlestick Charts and offer steps to help you read them.

History of Candlestick Chart

The creation of candlestick charts is widely credited to an 18th century Japanese rice trader Munehisa Homma. His prowess at gaming the rice trading markets was legendary. It is believed his candlestick methods were further modified and adjusted through the ages to become more applicable to current financial markets. Steven Nison introduced candlesticks to the Western world with his book “Japanese Candlestick Charting Techniques”. Candlesticks have become a staple of every trading platform and charting program for literally every financial trading vehicle. The depth of information and the simplicity of the components make candlestick charts a favorite among traders. The ability to chain together many candlesticks to reveal an underlying pattern makes it a compelling tool when interpreting price action history and forecasts.

What is a candlestick ?

What is candlestick chart pattern in stock market- stocksaim

A candlestick is a way of displaying information about an asset’s price movement. Candlestick charts are one of the most popular components of technical analysis, enabling traders to interpret price information quickly and from just a few price bars.

This article focuses on a daily chart, wherein each candlestick details a single day’s trading. It has three basic features:

  • The body, which represents the open-to-close range
  • The wick, or shadow, that indicates the intra-day high and low
  • The colour, which reveals the direction of market movement – a green (or white) body indicates a price increase, while a red (or black) body shows a price decrease

Over time, individual candlesticks form patterns that traders can use to recognise major support and resistance levels. There are a great many candlestick patterns that indicate an opportunity within a market – some provide insight into the balance between buying and selling pressures, while others identify continuation patterns or market indecision.

Before you start trading, it’s important to familiarise yourself with the basics of candlestick patterns and how they can inform your decisions

How to analyse candlestick charts

What is candlestick chart pattern in stock market- stocksaim candlestick

The body of the candle represents the opening and closing price of the trading done during the period. Knowing this is important for candlestick trading. Hence, traders can see the price range of the said stock for the said period at a glance. Also, the color of the body can tell them if the stock price is rising or falling. So, if a candlestick chart for one month with each candle representing a day has more consecutive reds, then traders know that the price is falling. 

Above and below the body are vertical lines called wicks or shadows that show the lows and highs of the traded price of the stock. Here is a scenario:

  • If the upper wick on a red candle is short, then it indicates that the stock opened near the high of the day. 
  • On the other hand, if the upper wick on a green candle is short, then it indicates that the stock closed near the high of the day.

Hence, a candlestick graph displays the relationship between the high, low, opening, and closing price of a stock. The body can be long or short and red or green. Also, shadows can be long or short. A combination of these displays the sentiment of the market towards the said stock. These details are important to know to understand how to read a candle chart.

Candlestick Chart Patterns

What-is-candlestick-chart-pattern-in-stock-market-stocksaim-Candlestick-Chart

Candlestick charts are an excellent way of understanding the investor sentiment and the relationship between demand and supply, bears and bulls, greed and fear, etc. Traders must remember that while an individual candle provides sufficient information, patterns can be determined only by comparing one candle with its preceding and next candles. To benefit from them, it is important that traders understand patterns in candlestick charts. For better understanding let’s divide the patterns into two sections:

  • Bullish candlestick patterns
    • Hammer
    • Inverse Hammer
    • Bullish Engulfing
    • Bullish Harami
    • Piercing line
    • Morning Star
    • Three white soldiers
  • Bearish Candlestick Pattern
    • Shooting Star
    • Bearish Engulfing
    • Bearish Harami
    • Evening Star
    • Three Black Crows
    • Dark Cloud Cover
  • Continuation Pattern
    • Doji
    • Spinning Top/Bottom
    • Falling Three Method
    • Rising Three Methods

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