Learn the logical approach to understand candlestick patterns with MoneyWiseMind's comprehensive guide. Part-I covers the basics, common patterns, and practical examples to help you improve your trading skills. Read now and enhance your knowledge of technical analysis to interpret candlestick charts.
There are various types of chart patterns - Line Chart, Bar Chart, Candlestick Chart etc. We use Candlestick Charts because they give us the information about OHLC means Open, High, Low, Close prices of an asset.
Japanese Candlestick as the name suggests originated from Japan. It was invented by a rice trader Honma Munehisa.
When the price arrives at a support or resistance it tends to break the support or resistance point to move either side. We have to identify first whether the price will go up or come down to initiate our trade. For identifying the price movement we need some confirmations. So we use candlestick patterns to initiate our trade.
There are two types of candlesticks:
Bullish - When closing price is higher than the opening price.
Bearish - When closing price is lower than the opening price.
A candle has three parts.
- Body
- Upper Wick
- Lower Wick
Again a candlestick pattern which forms by a single candle is called a single candlestick pattern and a candlestick pattern which is generated by two or more candles is called multiple candlestick pattern. We will try to understand one by one and its importance. Let's get started with the bullish candlestick patterns.
Bullish Patterns:
1. Bullish Marubozu:
This is a big bullish candle having no wick, which means bald headed.
Here, open=low, high=close, so it has no wick.
Bullish Marubozu indicates increased buying pressure in an asset among the buyers. That means the buyers are willing to pay higher prices irrespective of its price during the session. As a result, the price of the asset closes near its high point during the session.
Bullish Marubozu, when forms exactly at support or near support, indicates buying interest.
If it forms exactly at the resistance then it can be a trap.
As soon as the next candle crosses the high of the Bullish Marubozu candle one can take long position keeping stop loss at the low of the Marubozu candle.
2. Bullish Hammer:
It has a small body at the top and a long wick. It is a very powerful candlestick pattern. If it forms at the bottom after a downtrend which is a support then it indicates a buying pressure. That means buyers have entered into the stock. One can take long position in the stock as soon as the high is overtaken by the next candle keeping a stop loss at the low of the hammer candle. The longer the wick, the stronger the bullishness. In short a hammer is a bullish reversal pattern that shows price rejection at the lower level.
Bearish Patterns:
1. Bearish Marubozu:
This is a big bearish candle without having any wick.
Here, open=high, low=close.
It indicates extreme bearishness in the market. That means the sellers have full control on the market. Selling pressure is so extreme that the traders are willing to sell their stocks at every point during the session.
Location is the most important part. In a downtrend it indicates the continuation of a strong trend. If it forms in an uptrend, it gives a signal of trend reversal. Accordingly one can make position by exiting the long position or creating a short position.
2. Bearish Hammer/Shooting Star:
This is very significant candlestick pattern. It has a body with a long upper wick. The upper wick is about 2 or 3 times the length of the body.
Shooting Star candlestick pattern means that as soon as the market opens the buyers took control and pushed the price higher. During the buying climax a large selling pressure emerged and pushed the price lower, the selling pressure was so strong that it closed below the opening price. In short a bearish hammer or shooting star is a bearish reversal candlestick pattern that shows price rejection at higher level.
When this pattern forms in any asset at the resistance, one can make a short trade keeping stop loss at the high of the candle.
There are other single candlestick pattern such as Spinning Tops and Doji patterns which we have already explored in our previous threads.
Here’s what we have learned;
What is candlestick patterns?
There are two types of candles;
Bullish and Bearish
A candle has three parts;
Body, Upper wick and Lower wick.
Two types of candlestick patterns;
Single candlestick pattern and Multiple candlestick pattern.
Bullish patterns:-
1.Bullish Marubozu.
2.Bullish Hammer.
Bearish patterns:-
1.Bearish Marubozu.
2.Bearish hammer/Shooting star.
In our next thread will discuss about multiple candlestick patterns. Stay with us for the upcoming posts.
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
