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Candlestick trading explained – Poonit Rathore

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Candlestick trading explained - Poonit Rathore
Candlestick trading explained – Poonit Rathore

Candlestick trading is a method of technical analysis used in stock trading, forex trading, and other financial markets. It is based on the use of candlestick charts, which display the high, low, open, and close prices of an asset over a specific period of time.

Each candlestick on a chart represents a specific period of time, such as one day or one hour. The body of the candlestick, known as the real body, represents the range between the open and closed prices. The real body is typically colored green or white if the close price is higher than the open price, indicating a bullish trend, and red or black if the close price is lower than the open price, indicating a bearish trend.

The upper and lower shadows of the candlestick represent the highest and lowest prices during the period, respectively.

Candlestick chart pattern recognition is a popular method of identifying potential buy and sell signals in the market. Some common candlestick patterns include the hammer, Doji, and shooting star.

It’s important to note that the Candlestick chart is one of the many tools that traders use for their technical analysis. It’s not a standalone tool and it’s important to use other tools and indicators to confirm the signals. Additionally, it’s important to use it in combination with your own trading strategy and risk management plan.

What Is Candlestick Chart? Basics Of Technical Analysis Candlestick Explained By CA Rachana Ranade

(Video Credit: CA Rachana Phadke Ranade)

What is a candlestick?

A candlestick is a type of chart used in technical analysis to display the price movement of a financial asset over a specific period of time. Candlestick charts are typically used in stock trading, forex trading, and other financial markets.

Each candlestick on a chart represents a specific period of time, such as one day or one hour. The body of the candlestick, known as the real body, represents the range between the open and closed prices. The real body is typically colored green or white if the close price is higher than the open price, indicating a bullish trend, and red or black if the close price is lower than the open price, indicating a bearish trend.

The upper and lower shadows of the candlestick represent the highest and lowest prices during the period, respectively.

Candlestick chart pattern recognition is a popular method of identifying potential buy and sell signals in the market. Some common candlestick patterns include the hammer, Doji, and shooting star.

In other words, A candlestick shows an asset’s price movement over a set amount of time. This can be anywhere from a minute to a day, depending on the price chart. They display four different price levels which an asset has reached in the specified time period: the lowest point in an asset’s price, the highest point, and the open and close prices.

Candlestick
(Image Credit: IG.com)

Candlestick patterns are used in all forms of trading, including forex, indices, shares, and commodities trading.

Complete guide to candlesticks in Hindi | Candlestick patterns for beginners | Trading with @Groww

(Video Credit: Trading with Groww)

How to read candlesticks?

You read a candlestick by looking at its colour, body, and wicks. Knowing how to read candlestick charts can help you to identify or predict market movements.

Colour of the candlestick

The colour of a candlestick is used to indicate the way in which a market has previously moved or is currently moving. From the above example, you can see that the chart will be green if the close price is higher than the open price, and will be red if the close price is lower than the open price. As such, the colour of a candlestick is a good indicator of whether a market was bullish or bearish during the given period.

When looking at a candlestick chart, the candlestick on the far left will be from the oldest trading period, and the one on the far right will represent the newest or current trading period. The current candlestick can be moving because the current price is used instead of the close price, meaning the candlestick’s colour could shift from green to red or vice versa before the trading period is over.

Candlestick chart
(Image Credit: IG.com)

Sometimes, you may find that the candlesticks on a graph are filled and not filled, rather than being green and red. An unfilled or white candlestick is the same as a green candlestick, and a filled or black candlestick is the same as a red candlestick.

Body of the candlestick

The body of a candlestick is used to show the difference between an asset’s open and close price (or the current price for the candlestick on the far right). If the candlestick is green, then the bottom of the body represents the opening price and the top represents the closing price. If the candlestick is red, then the opposite is true, the top represents the opening price and the bottom represents the closing price.

Equally, if the body of the candlestick is long then there has been a period of intense buying and selling. If the body of the candlestick is short, then there has been more of a consolidation in the market for that period.

Body of the candlestick
(Image Credit: IG.com)

Wick of the candlestick

The wick or ‘shadow’ of the candlestick shows the highest and lowest prices reached by an asset in the given time period. The top wick, also known as the upper shadow, is the highest price. The bottom wick, or lower shadow, is the lowest price.

A candlestick with a long upper wick and short lower wick shows that buyers were very active during a trading period. However, sellers soon forced prices to fall from their highs, causing the markets to close lower than the level that the upper wick reached. The weak closing price created a long upper shadow.

Conversely, a candlestick with a long lower wick and short upper wick shows us that sellers drove prices lower initially, but then buyers bought cheap and caused prices to recover, with the markets finishing strongly as evidenced by the long lower shadow.

Wick
(Image Credit: IG.com)

The current candlestick will have dynamic wicks, moving in line with price increases and declines for the given time period.

In shorts,

Reading candlesticks involves analyzing the shape, color, and position of the candlesticks on a chart to identify potential buy and sell signals. Here are some key points to consider when reading candlesticks:

  1. The real body of the candlestick represents the range between the open and closed prices. A green or white real body indicates that the close price is higher than the open price, indicating a bullish trend. A red or black real body indicates that the close price is lower than the open price, indicating a bearish trend.
  2. The upper and lower shadows of the candlestick represent the highest and lowest prices during the period. Longer shadows indicate more volatility during the period.
  3. Candlestick patterns can provide potential buy and sell signals. Some common patterns include the hammer, Doji, and shooting star. For example, a hammer pattern is a bullish signal that occurs when a real body is at the top of the candlestick, with a long lower shadow and little or no upper shadow.
  4. Candlestick patterns are more reliable when they occur after a trend.
  5. It’s important to use candlestick charts in conjunction with other technical analysis tools, such as moving averages, trend lines, and indicators like RSI, MACD, and Fibonacci retracement, to confirm potential signals and make more informed trading decisions.
  6. Also, it’s important to use candlestick patterns with a proper risk management plan and trading strategy that suits your goals and risk profile.

It’s important to keep in mind that candlestick patterns are not always reliable and that they should be used in conjunction with other technical analysis tools and fundamental analysis. Additionally, it’s important to practice reading candlesticks and test them with historical data before using them in live trading.

Types of candlestick patterns

There are many candlestick patterns, which act as useful indicators for traders looking to make price movement predictions. Here is a list of some of the most common candlestick patterns:

Bullish Patterns:

  • Bullish Engulfing
  • Bullish Harami
  • Bullish Harami Cross
  • Hammer
  • Morning Star
  • Bullish Abandoned Baby
  • Three White Soldiers
  • Bullish Three Line Strike
  • Bullish Three Inside Up
  • Bullish Three Outside Up
  • Bullish Bullish Kicking
  • Bullish Bullish Breakaway

Bearish Patterns:

  • Bearish Engulfing
  • Bearish Harami
  • Bearish Harami Cross
  • Shooting Star
  • Evening Star
  • Bearish Abandoned Baby
  • Three Black Crows
  • Bearish Three Line Strike
  • Bearish Three Inside Down
  • Bearish Three Outside Down
  • Bearish Bearish Kicking
  • Bearish Bearish Breakaway

Neutral Patterns:

  • Doji
  • Spinning Top
  • Inside Bar
  • Harami
  • Harami Cross

For instance, one of the bullish candlestick patterns is known as the ‘hammer’ and is formed of a short body with a long lower wick. It is normally found at the end of a downward trend and can be a good indicator of future upward trends.

Hammer candlesticks

Another candlestick pattern is the Doji, which many belief indicates uncertainty from traders in the market. The Doji is comprised of a short or non-existent body and wicks of varying lengths. Sometimes, a Doji can resemble a cross, because a doji’s pattern often has similar open and close positions but varying session high and low positions.

Doji candlestick

Learn more with our guide to 16 candlestick patterns every trader should know

Candlesticks vs HLOC (OHLC) bar charts

Candlestick graphs are similar to high-low-open-close (HLOC) bar charts. They are both technical analysis indicators, and they both require a certain understanding before traders can use them and learn from them effectively. The main difference is that a HLOC chart lays out the information without the use of the ‘body’ of a candlestick.

Bar chart

Some traders prefer the simplistic nature of bar charts over candlesticks, while others prefer the aesthetic of candlesticks and say that they offer better clarity. They are both, more or less, the same thing. They both indicate market highs and lows, and the open and close prices for an asset in a particular time frame.

Bar and candle chart

How to use candlesticks when trading?

The different parts of a candlestick pattern all tell you something. What they tell you is another question entirely. Sometimes, the shape, colour, and direction of a candlestick can seem random, but other times a number of candlesticks may form to make a pattern.

Candlestick patterns are capable of revealing areas of support and resistance and are also valuable to traders as a means through which they can confirm their predictions about market movements. However, it is worth mentioning that there is a lot that candlesticks cannot tell you. For instance, you can’t use candlesticks to tell you why the open and close are similar or different.

As such, candlestick patterns should be used in conjunction with other forms of technical and fundamental analysis to greater confirm a trader’s suspicions of an overall trend.

Candlestick patterns are formed by the combination of one or more candlesticks and can provide potential buy and sell signals. Here are some common types of candlestick patterns:

  1. Bullish patterns:

Bullish patterns are candlestick patterns that indicate a potential upward trend or reversal in the market. Here are a few examples of bullish candlestick patterns:

  1. Bullish Engulfing: A bullish pattern where a small red or black candlestick is followed by a large green or white candlestick that completely engulfs the red one, indicating a potential bullish reversal.
  2. Bullish Harami: A bullish pattern that occurs when a large red or black candlestick is followed by a small green or white candlestick, which is completely engulfed by the first one, indicating a potential bullish reversal.
  3. Bullish Harami Cross: A bullish pattern that occurs when a large red or black candlestick is followed by a Doji, which is completely engulfed by the first one, indicating a potential bullish reversal.
  4. Hammer: A bullish pattern that occurs when a real body is at the top of the candlestick, with a long lower shadow and little or no upper shadow, indicating a potential bullish reversal.
  5. Morning Star: A three-candlestick pattern that occurs at the end of a downtrend, with a small red or black candlestick, a large gap down, and a large green or white candlestick, indicating a potential bullish reversal.
  6. Three White Soldiers: A bullish pattern that occurs when three consecutive long green or white candlesticks appear after a downtrend, indicating a potential bullish reversal.
  • Bullish Engulfing: A bullish pattern where a small red candlestick is followed by a large green candlestick that completely engulfs the red one, indicating a potential bullish reversal.
  • Hammer: A bullish pattern that occurs when a real body is at the top of the candlestick, with a long lower shadow and little or no upper shadow, indicating a potential bullish reversal.
  • Morning Star: A three-candlestick pattern that occurs at the end of a downtrend, with a small red candlestick, a large gap down, and a large green candlestick, indicating a potential bullish reversal.
  1. Bearish patterns:

Bearish patterns are candlestick patterns that indicate a potential downward trend or reversal in the market. Here are a few examples of bearish candlestick patterns:

  1. Bearish Engulfing: A bearish pattern where a small green or white candlestick is followed by a large red or black candlestick that completely engulfs the green one, indicating a potential bearish reversal.
  2. Bearish Harami: A bearish pattern that occurs when a large green or white candlestick is followed by a small red or black candlestick, which is completely engulfed by the first one, indicating a potential bearish reversal.
  3. Bearish Harami Cross: A bearish pattern that occurs when a large green or white candlestick is followed by a Doji, which is completely engulfed by the first one, indicating a potential bearish reversal.
  4. Shooting Star: A bearish pattern that occurs when a real body is at the bottom of the candlestick, with a long upper shadow and little or no lower shadow, indicating a potential bearish reversal.
  5. Evening Star: A three-candlestick pattern that occurs at the end of an uptrend, with a small green or white candlestick, a large gap up, and a large red or black candlestick, indicating a potential bearish reversal.
  6. Three Black Crows: A bearish pattern that occurs when three consecutive long red or black candlesticks appear after an uptrend, indicating a potential bearish reversal.
  7. Bearish Abandoned Baby: A bearish pattern that occurs when a Doji is found after a gap up, indicating a potential bearish reversal.
  • Bearish Engulfing: A bearish pattern where a small green candlestick is followed by a large red candlestick that completely engulfs the green one, indicating a potential bearish reversal.
  • Shooting Star: A bearish pattern that occurs when a real body is at the bottom of the candlestick, with a long upper shadow and little or no lower shadow, indicating a potential bearish reversal.
  • Evening Star: A three-candlestick pattern that occurs at the end of an uptrend, with a small green candlestick, a large gap up, and a large red candlestick, indicating a potential bearish reversal.
  1. Neutral patterns:

Neutral patterns are candlestick patterns that indicate indecision or lack of direction in the market. Here are a few examples of neutral candlestick patterns:

  1. Doji: A neutral pattern that occurs when the open and close prices are virtually the same, indicated by a small real body, with a long upper and lower shadow, indicating indecision in the market.
  2. Spinning Top: A neutral pattern that occurs when a small real body is found with a long upper and lower shadow, indicating indecision in the market.
  3. Inside Bar: A neutral pattern that occurs when a candlestick’s range is completely inside of the previous candlestick’s range, indicating indecision.
  4. Harami: A neutral pattern that occurs when a large candlestick is followed by a small candlestick that is completely engulfed by the first one, indicating indecision.
  5. Harami Cross: A neutral pattern that occurs when a large candlestick is followed by a Doji that is completely engulfed by the first one, indicating indecision.
  • Doji: A neutral pattern that occurs when the open and close prices are virtually the same, indicated by a small real body, with a long upper and lower shadow, indicating indecision in the market.

Here are a few more types of candlestick patterns:

  1. Bullish patterns:
  • Bullish Harami: A bullish pattern that occurs when a large red or black candlestick is followed by a small green or white candlestick, which is completely engulfed by the first one, indicating a potential bullish reversal.
  • Bullish Harami Cross: A bullish pattern that occurs when a large red or black candlestick is followed by a Doji, which is completely engulfed by the first one, indicating a potential bullish reversal.
  1. Bearish patterns:
  • Bearish Harami: A bearish pattern that occurs when a large green or white candlestick is followed by a small red or black candlestick, which is completely engulfed by the first one, indicating a potential bearish reversal.
  • Bearish Harami Cross: A bearish pattern that occurs when a large green or white candlestick is followed by a Doji, which is completely engulfed by the first one, indicating a potential bearish reversal.
  • Bearish Abandoned Baby: A bearish pattern that occurs when a Doji is found after a gap up, indicating a potential bearish reversal.
  1. Neutral patterns:
  • Spinning Top: A neutral pattern that occurs when a small real body is found with a long upper and lower shadow, indicating indecision in the market.
  • Three White Soldiers: A bullish pattern that occurs when three consecutive long green or white candlesticks appear after a downtrend, indicating a potential bullish reversal.
  • Three Black Crows: A bearish pattern that occurs when three consecutive long red or black candlesticks appear after an uptrend, indicating a potential bearish reversal.

It’s important to keep in mind that there are many other candlestick patterns that can be identified, and it’s important to use them in conjunction with other technical analysis tools and fundamental analysis to make more informed trading decisions. Additionally, it’s important to practice reading candlestick patterns and test them with historical data before using them in live trading.

Mastering Candlestick Course | Candlestick Pattern |Stock Market | हिंदी | MMTCourse by Tushar Ghone

(Video Credit:Money Making Trading Courses By Tushar Ghone)

Poonit Rathore

My name is Poonit Rathore. I am a Blogger, Content-writer, and Freelancer. Currently, I am pursuing my CMA final from ICAI. I live in India.

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