IntroductionThe Japanese began using candlestick patterns for over 100 years before the West developed the bar and point and figure system. the candlestick charting basics used today was developed by Homma Candlestick Charting has now become more popular and use, credit all goes to Steve Nisson and Greg Morris. According to Steve Nison, candlestick charting first appeared sometime after 1850.
How to read candlestick patterns - Each candlestick is represented by 4 price points: Closing price Highest price Opening price Lowest price The distance between the closing and opening values is defined as the body.
When the closing value is higher than the opening price, then the candlestick is bullish (going up) and its body normally has a white (or green) color. and a bearish (going down) candlestick isformed whenever the opening price is above theclosing value. This is usually black (or red).
Long Candles Vs Short Candles- Generally long candle indicates more intense buying or selling pressure, Moreover short candle indicates less buying or selling pressure
Check out the various candlestick patterns and formation below to understand it better.
Abandoned Baby- The abandoned baby indicates strong reversal signal, composed of a doji star, This pattern usually seen in a down trend or in up trend, usually on a first long candle and and second day doji candle appears with gap of previous day closing. As you can seen in image below.
Doji- is a very powerful trading signal.A Doji will often appear as a cross or plus sign. The larger the time frame the more important the signal. It is at this juncture that we often see dramatic reversals in the market.
Downside Tasuki Gap:- The downside tasuki gap begins with a set of 3 candlesticks. The first candlestick is large and bearish and clearly states the bearish intent of the trend. The next day, price gaps down to the second candlestick which is also bearish. The third candlestick is a bull candlestick that attempts to close the gap but doesn’t do so.
Dragonfly Doji:- Indicates Pattern is strongest after an established bearish trend. A candle forms with a very small to almost nonexistent body with a long lower wick. Little or no upper wick. In this pattern, open, high, and close are at the high of the day. Long positions can be taken once high of the candle is exceeded
Engulfing Pattern:- is very effective when found in oversold area, at the end of a continues downtrend or the overbought area for the pattern. The Engulfing pattern consists of two bodies. The first body is the same color as the current trend, the second is the opposite color. The signal day opens lower than the previous days close, then it trades higher so by the end of the day, it will close above the previous days open.
Evening Doji Star:- It is a reversal candlestick pattern which is bearish in nature and appears at the end of bullish trend. It is a complex pattern made of three candles. The first candle is bullish in nature, the second is indecisive in nature and third candle is bearish in nature. This pattern appears just before price fall, and it contains a doji.
Evening Star:- A large white body followed by a small body that gaps above the white body. The third candlestick is a black body that closes 50% or more into the white body, Interpretation: A top reversal signal..
Falling Three Methods:- The Falling Three Methods is a bearish continuation pattern. It indicates continuation of bearish trend. The first candle is strong, in which case it should have a long black body. The next three candles that follow are small relative to the first candle and in the opposite direction, in this case up days. The last candle, is another long black (bearish) candle that should close below the real body of the first candle.
Gravestone Doji:- The Gravestone Doji has a long upper shadow and no lower shadow, and it forms when the open, low and close are equal. The high is what creates the long upper shadow
The Gravestone Doji signal indicates that prices were driven higher during the session, and by the end of the session, the prices came back down to the opening level and the session low as a result of the sellers. As with other Doji's, this candlestick has a potential to change direction..
Hammer:- A hammer is a bottom reversal signal. It has long lower shadow & a small real body -black or white at its top, There should be a continues downtrend formation in order for the hammer to reverse the trend. The stronger the downtrend before it and the longer the lower shadow the more bullish this formation is.
Hanging Man:- The hammer and hanging man both looks alike but have totally different meanings depending on past price action. Both have little bodies (black or white), long lower shadows, and short or absent upper shadows. After a long uptrend, the formation of a Hanging Man is bearish because prices hesitated by dropping significantly during the day
Harami:- One of the major candlestick patterns is called the harami. The bullish harami is a two-candle pattern. The first candle is usually a large black one. The second candle opens above the previous day's close and closes below the previous day's open. The pattern is more effective when the second, smaller candlestick is a doji (a candlestick with no, or a very small, body). Harami means "pregnant" in Japanese. A harami at the support level, associated with other indicators, can provide indications of a significant reversal.
Harami Cross:- The Harami Cross is a indicator of trend reversal, particularly when it occurs after a long body in a downtrend. It is the same as the Harami, except that the second candle is a Doji. How to Recognise a Harami Cross: The second candle has the same open and close prices, i.e. it is a Doji. The Doji candlestick fits within the longer body of the preceding trading period. The longer body is part of a sustained directional trend.
Inverted Hammer:- This is a bullish reversal candlestick pattern. It occurs at the bottom of a trend. Inverted hammer occurs at the bottom of a downtrend and indicates the possibility of reversal of the downward trend.
Long Day:- This is a candlestick pattern which has a body with a very long range (long body) and a very small shadow..
Long-Legged Doji:- The Long-legged Doji has a long upper and lower shadows with the price in the middle of the range (Closing and opening almost at same price.). This shows indecision of traders
Long Shadows:- The upper or lower shadows of candlesticks are the thin lines stretching above and below the body. The price distance between the open and high is called the upper shadow. The price distance between the open and the low is called the lower shadow.
If a candlestick has a long upper shadow and short lower shadow, that means the demand increases the price, but for some reasons or another, sellers involve in and bring prices back down.
If a candlestick has a long lower shadow and short upper shadow, that means there is a selling pressure that forces price lower, but for some reasons or another, buyers involve in and bring prices back up.
Marubozu:- A long candlestick (black or white) with no shadow or tail. The high and the lows represent the opening and the closing prices. Considered a continuation pattern either bullish or bearish..
Morning Doji Star:- Seems to form a little star that appears after a black bearish candlestick and then little star makes the atmosphere becomes bright. This indicates reversal from bearish trend to bullish.
Morning Star:- A long black day is followed by a small day that gaps in the direction of the trend. The third day is a white day which closes in the top half of the black day. it happens in a downtrend or during a pullback within an uptrend, the market gaps down but enough buyers step in to halt the weakness.
Piercing Line:- A long black body forms in a downtrend which continues the bear trend. A gap to the downside on the next days open further perpetuates the bearishness. the next day after, the market rallies all day and closes much higher. In fact the close is above the midpoint of the body of the long black day..
Rising Three Methods::- This pattern indicates a rest in market action It happens when the market is on an uptrend. Day 1 has a long white bullish candle Then there are small bodies defining a brief downtrend but it stays between the range of Day 1 on the second, third and fourth days and then Day 5 has a long white candlestick opening above the close of Day 4 and closing at a new high. .
Shooting Star:- The Shooting Star candlestick formation is a bearish reversal candlestick pattern that mainly occurs at the top of bullish trend. The Shooting candlestick is created when the open, low, and close are roughly the same price..
Spinning Top:- Candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The pattern indicates the indecision between the buyers and sellers. The upper and lower long wicks tell us that both the bulls and the bears had the upper hand at some point during the time period the candle represents.
Stick Sandwich:- it consists of two dark candles with a white candle in between. The closing prices of the two black candles are equal. This indicates an support price. The probability of a reversal in the trend is high from this area..
Three Black Crows:- This three black crows pattern is also known as three winged crows. It contais three consecutive black candles that opens with upside price gap. This three black crows pattern is a bearish reversal candlestick pattern, so it is valid when it occurs in bull trend. The three candles should close at or near their lows.
Three White Soldiers:- A long bullish candle that indicates the end of a bear trend. A second long bullish candle that continues the rally & closes near the high. A third long bullishh candle that takes the market higher and also closes near the high This formation is more significant if it occurs at an support.
Upside Gap Two Crows:- Two crows is actually a warning of top reversal It happens when market is on an bullish trend The long bullish candlestick on the Day 1 shows the continuation of the bullish trend A bear body appears on 2 day with a gap. And Another bear candle appears on Day 3. The opening is higher than that of Day 2 and its closing is lower than Day 2 and Day 3 close is above the close of Day 1.
Upside Tasuki Gap:- The upside tasuki gap is a bullish continuation trend and is the result of temporary profit booking in a strong bullish market. In another words it signifies a continuation of a prevailing trend, even after a correction day, &it is considered to be a rare pattern.