Candlestick patterns are a powerful tool for understanding and predicting price movements in the stock market. They are a visual representation of price movements in each timeframe, say a day, week, or month. Each candlestick consists of a rectangular “body” and “wicks” or “shadows” on either side. The body represents the opening and closing prices, while the shadows indicate the high and low prices during that period.
Candlestick patterns can be broadly categorised into two main groups: bullish patterns and bearish patterns. Bullish patterns signal potential price increases, while bearish patterns indicate possible price declines.
Three most popular bullish patterns:
Hammer: The hammer candlestick pattern has a short body with a long lower wick. It is typically spotted at the end of a downtrend and suggests that even though there was a lot of selling going on during the day, a powerful force of buyers managed to push the price back up.
Bullish engulfing: The bullish engulfing pattern is made up of two candles. The first one is a small red candle, and it is entirely covered by a bigger green candle. Even though the second day starts with a lower price than the first day, the bullish market takes control and pushes the price higher.
Morning star: The morning star candlestick pattern is often seen as a ray of hope during a gloomy market downtrend. This pattern consists of three candles: a short-bodied candle sandwiched between a long red one and a long green one. Traditionally, the ‘star’ candle has no overlap with the longer bodies, and both the open and closed prices create gaps. This pattern signals that the intense selling pressure from the first day is starting to ease, suggesting that a bullish trend may be emerging on the horizon.
Three most popular bearish patterns:
Shooting star: The shooting star, which resembles an inverted hammer, is a candlestick pattern formed within an uptrend. It features a small lower body and a long upper wick. Typically, the market opens with a slight gap to the upside, experiences a rally to an intra-day high, and then closes at a price just above the opening level, resembling a star falling to the ground. This pattern often indicates a potential reversal from the uptrend.
Bearish engulfing: The bearish engulfing pattern usually shows up when an uptrend is about to end. It starts with a small green candle, and then a big red candle comes along and completely covers the green one. This pattern tells us that the price might be hitting a high point or slowing down, and it’s a sign that the market might be getting ready to head down. The bigger the red candle is compared to the green one, the stronger the upcoming downward trend might be.
Evening star: The evening star is like the opposite of the morning star, and it’s made up of three candles. First, there’s a long green candle, then a short one, and finally, a big red one. This pattern shows that an upward trend might be changing, and it’s quite powerful when the third candle wipes out the gains from the first one.
Tips for using candlestick patterns:
- Candlestick patterns are most effective when used in conjunction with other technical indicators, such as price charts, moving averages, and support and resistance levels.
- It is important to consider the overall market trend when interpreting candlestick patterns. For example, a bullish engulfing pattern is more likely to be a sign of a trend reversal if it occurs at the end of a downtrend.
- Candlestick patterns should not be used in isolation. It is important to do your own research and understand the risks involved before making any trading decisions.
Here are some unknown candlestick patterns that you may not have heard of:
- Island Reversal Pattern: This pattern is formed by two candles with gaps on both sides. The first candle is a long red or green candle, and the second candle is a short red or green candle. The gaps between the candles suggest that there was a significant change in market sentiment, and the pattern can be used to signal a potential trend reversal.
- Hook Reversal Pattern: This pattern is similar to the island reversal pattern, but the gap on one side is much smaller than the gap on the other side. The pattern is said to resemble a fish hook, and it can also be used to signal a potential trend reversal.
- San-Ku (Three Gaps) Pattern: This pattern is formed by three candles with gaps on both sides of each candle. The first candle is a long red or green candle, the second candle is a short red or green candle, and the third candle is a long red or green candle. The pattern is said to be very reliable, and it can be used to signal a strong trend reversal.
- Kicker Pattern: This pattern is formed by two candles with long wicks on the same side. The first candle is a red or green candle with a long lower wick, and the second candle is a red or green candle with a long upper wick. The pattern is said to be a sign of indecision in the market, and it can be used to signal a potential continuation of the current trend or a trend reversal.
Note: It is important to note that these unknown candlestick patterns are not as well-known or researched as the more popular patterns. However, they can still be useful for traders who are looking for additional confirmation of their trading signals.
Additional tips for using candlestick patterns in the Indian stock market:
- Candlestick patterns should be used in conjunction with other technical indicators, such as moving averages and MACD, to get a more complete picture of the market.
- Candlestick patterns are more reliable when they form at key support and resistance levels.
- It is important to consider the overall market trend when interpreting candlestick patterns.
- Candlestick patterns can be used to generate both buy and sell signals. However, it is important to note that no candlestick pattern is foolproof.
Candlestick patterns are a valuable tool for technical analysis in the Indian stock market. They can be used to identify potential price reversals and trends. However, it is important to use candlestick patterns in conjunction with other technical indicators and to consider the overall market trend when interpreting them.
To learn more about the Candlestick Patterns in more detail, check out this article below:
Disclaimer: This post is for educational purposes only and should not be construed as financial advice. Please consult a financial advisor before making any investment decisions.