The identification and interpretation of candlesticks in the stock market!

Have you ever wondered why some traders seem to have an uncanny ability to predict market movements? What is their secret? Well, one of the keys to their success is their mastery of stock market candle patterns. Don’t worry; you don’t need to be a magician to understand them. Let’s dive deep into it!

What is a candlestick pattern?

Candlestick chart patterns are formed by a combination of one or more candlesticks, which can indicate potential changes in market direction or trend. They are named after their candle-like shape, which consists of a rectangular body and wicks or shadows extending from the top and bottom of the body.

Let’s take a deep dive into some of the types of candlestick patterns and understand them better.

Spinning top candlestick pattern

These are candlesticks with a small body and long upper and lower wicks. They can indicate equilibrium and indecision in the market, as the price opened and closed at similar levels, but there was significant movement up and down during the period. 

• The longer the upper and lower shadows, the stronger the signal of indecision.
• If spinning top candlesticks appear after a strong uptrend or downtrend, it may signal a potential reversal.
• Look for confirmation of a trend reversal or continuation by observing the price action in the subsequent candles.

Marubozu candlestick pattern

The marubozu pattern is characterised by a long body with little to no wicks, indicating a strong trend in the market. 

• The marubozu is most effective when it appears at the beginning of a trend and the length of the body and the trading volume are directly proportional to the strength of the trend.
• A white or green marubozu indicates a strong uptrend, while a black or red indicates a strong downtrend.
• If marubozu candlesticks appear in a series, it may signal a continuation of the trend.
• The body of the candlestick must be at least two times the length of the upper and lower shadows.

What is a hammer candlestick?

A hammer candlestick is a bullish reversal pattern that forms after a downtrend. It has a long lower shadow and a short body at the top. The long lower shadow represents the buyers pushing the price up from the low, while the short body at the top represents the sellers trying to bring the price back down. 

• The longer, the lower the shadow, the stronger the signal of a potential reversal.
• If the hammer appears after a long downtrend, it may signal a trend reversal.
• The lower shadow of the candlestick must be at least two times the length of the body.
• There should be little or no upper shadow.

What is doji?

Doji is a single candlestick pattern that has an open and close price that is almost identical. It represents a period of indecision where the open and close prices are usually located near the middle of the candlestick, creating upper and lower wicks of equal length. 

• The Doji candlestick has a small body with long upper and lower shadows.
• Use the Doji pattern in conjunction with other technical indicators such as trendlines, support, and resistance levels.
• Wait for confirmation of the pattern with a third candlestick, which shows the trend has reversed.

What is an engulfing candlestick? 

An engulfing candlestick is a two-candle pattern that signals a potential trend reversal. The second candle completely “engulfs” the first candle, meaning it has a larger body and eclipses the first candle’s high and low. 

To incorporate it into your trading strategy:

• Place a buy order above the high of a bullish engulfing candlestick with a stop-loss order below the low and a sell order below the low of a bearish engulfing candlestick with a stop-loss order above the high.
• If the engulfing candlestick is confirmed by other technical indicators, such as volume or moving averages, it may indicate a stronger trend reversal.
• For swing trade, look for engulfing candlesticks on the daily or weekly chart to identify long-term reversals.

What is a harami candlestick?

Harami is a Japanese word that means “pregnant.” It is called Harami because the second candlestick is inside the first, like a baby in a mother’s womb. It is a powerful candlestick pattern that suggests a reversal and a potential change in the trend.

Trading rules:

• The first candlestick should be a long candlestick, indicating a strong trend.
• The second candlestick should be a short candlestick, with a small body that is completely engulfed by the first candlestick’s body.
• The second candlestick should also have an opposite colour from the first candlestick.

The pattern suggests that the first candlestick’s trend is losing momentum and that the second candlestick’s trend is taking over.

Bottomline

Each candlestick has a unique indication, whose interpretation can take stock market traders a long way. So, take the time to learn about these patterns and incorporate them into your trading strategy to maximise your profits!

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