Essential Handbook for Understanding Candlestick Analysis of Stock Price Action

Today, every changing dynamics of the stock market involves much technicality whereby technical analysis is one of the most essential tools that can be used by traders. It has been established that in the myriad of tools to choose from, candlestick charts defy the odds to offer the best and simplest graphs. In this article, the author shares full information on the possible combinations of single, double, and multiple formations in the candlestick patterns as a useful trading tool.

Introduction to Candlestick Charts

Representation of candlesticks

Candlestick charts date back more than 300 years, and the first charts were primarily applied to the rice price analysis in Japan. Today, they are a part of the arsenal of any active trader at least, those, who is working in developed countries of the world. Candlestick chart present on the price bar of an individual time horizon showing the opening, closing, high, and low prices. The actual formation of a candlestick comprises of a body and its wicks or shadows: the body defines the price range between the opening and closing prices while the wick defines the highest and the lowest prices in that period.

In candlestick charts, the color of the candlestick body usually defines the ending status of the price where an elongated green or white candlestick portrays the price going up while a dark red or black candlestick signifies the price going down. This clear and concise form of visual representation enables traders to easily identify the current market climate and trends together with the prospect of change in price.

Single Candlestick Patterns

The single candlestick patterns are the fundamental of the more-complicated patterns that are looked at when analyzing a market. They can give an instant information about the possible change or sustained pattern in the marketplace. Here are a few key single candlestick patterns:Here are a few key single candlestick patterns:

Doji

A Doji bar appears when both the opening and the closing prices are similar, this comes with a very small or in some cases no body at all. This type means that the market is unsure where to go and, pending on the previous trend, can be a signal for a reversal or a continuation. Dojis have several close relatives, namely the Long-Legged Doji, the Dragonfly Doji, and the Gravestone Doji, which offer subtle signals of market sentiment.

Hammer

The Hammer is a double bullish reversal pattern, which emerges after the downtrend of the prices. It is identified by having a tiny body that is located at the upper boundary of the price range, and having a lengthy lower wick. This formation means that the signal displayed is that during the period, the price was declining due to sell pressure, however buying pressure was strong enough to force the price back up, thus a possible reversal.

Shooting Star

Like Hammer, the Shooting Star is the bearish cousin because it has the same appearance. This form occurs when an uptrend line is drawn at the bottom of the price pattern and boom has a small body at the lower end of the trading range and a long upper wick. This pattern suggests that buyers acted to raise the price before sellers forced it down, which could be a reversal.

Spinning Top

This spinning top has a small body with both wicks of equal size at the bottom part showing that there is confusion in the market. This pattern can occur in both the uptrend and downtrend and it normally indicates that there could be a chance of at least a brief reversal back to the trend that was in action before the formation of the pattern.

Double Candlestick Patterns

Double candle patterns are those where two candles when taken together provide more accurate signal than where single candle patterns are found alone. Here are some common double candlestick patterns:Here are some common double candlestick patterns:

Engulfing Pattern

The Engulfing pattern comes in two variants: There is Bullish Engulfing and Bearish Engulfing which are often used in technical analysis of stock prices.

• Bullish Engulfing: Formed at the end of an up or downtrend and consists of a small bearish candle and a much larger bullish candle that abso rbs the body of the previous candle. This points to a high demand since they are signalling a possible trend reversal.
• Bearish Engulfing: It is formed at the end of an uptrend, and its formation includes a small upward punctuated by a significantly bigger downward pointing candle which fully engulfs the small upward pointing candle. This indicates that prices are under significant selling pressure and may be forming a reversing pattern.

Harami

The Harami pattern also has bullish and bearish versions:The Harami pattern also has bullish and bearish versions:

• Bullish Harami: This pattern emerges after a bearish trend whereby a dark candle is succeeded by another candle that is small and green with its full body enclosed within the large bear candle. It points the downside as the selling sentiments dial down.

• Bearish Harami: It’s formed after an uptrend and is made up of a large bullish candle that is then followed by a less significant bearish candle that is contained within the body of the first big bullish candle. This can be interpreted as declining buying pressure and reaching the ‘top.’

Tweezer Tops and Bottoms

• Tweezer Tops: It shows that the current trend is bearish and happens at the end of an upward trend where two different candles have the same high. It is often used to suggest that buyers were unable to propel the price higher on their second try which may be an indication of reversal.

• Tweezer Bottoms: It is a bullish reversal pattern and signals the beginning of an upward pull after a downtrend and formed by two candles with the same base. This provides an indication that the price decrease effort made by sellers was lacking the second time around, a sign of a reversal.

Multiple Candlestick Patterns

Another type of candlestick patterns is those formed by three candles or more, and they are even stronger for trading. Here are a few notable multiple candlestick patterns:Here are a few notable multiple candlestick patterns:

Morning Star

The Morning Star is a bullish reversal pattern consisting of three candlesticks:

1.  This is a bearish candle which is long and signals that there is considerable selling pressure.
2.  Small-bodied candle that also signifies uncertainty, a transitional figure that is either bullish or bearish.
3. An independent tall candle that penetrates well into the range of the initial bearish candle suggests that there is a reversal of the trend due to the prolonged and strong buying pressure.

This sort of trend line is drawn along a series of low and is usually broken at the end of a downtrend indicating an upward direction of movement known as the Morning Star.

Evening Star

The Evening Star is the bearish counterpart to the Morning Star and consists of three candlesticks:The Evening Star is the bearish counterpart to the Morning Star and consists of three candlesticks:

1. A bullish candle with a long lower wick showing that there was forceful buying after some opening weakness.
2. It is a small-bodied candle, which may be bullish or bearish, meaning that the direction of the trend is still unknown; it lies on top of both the bullish and the bearish phase.
3. When a long bearish candle is followed by a very small bullish candle where the bullish candle opens well above the high of the bullish bearish candles but closes well within the real body of the preceding bullish candle showing that bears were strong than the bulls and have possibly reversed the trend.

Starts at an uptrend end of a higher level usually the Evening star signals the initiation of the downward trend.

Three White Soldiers

The Three White Soldiers pattern is fundamentally a reversal pattern that only appears when there are three straight lengthy bullish candles with increasing typical corresponding to the increasing volumes. This pattern informs of a higher buying pressure and the strong possibility of further increase in the price of the security. Every given candle in the pattern should overlap the body of the previous candle and should also be closing near its highest point, signifying continuous accumulation.

Three Black Crows

The Three Black Crows pattern is bearish reversal pattern of which is represented by three long bearish candles where the close price is continuously declining. This signal shows that there is a high demand for a particular product and that there is a good chance that it will keep dropping. Every candle of the pattern should start from the body of the previous bar and close at or near its lower end, which shows that there is strong selling pressure.

3 Inside Up and Down

Three Inside Up: Happens after a downtrend and is a bullish reversal pattern, which composes of three candlesticks. Firstly, the first candle is a bearish candle that is longer in duration than the second and third candles; the second is a bullish candle whose real body is formed entirely within the real body of the first cable but opens and closes below that of the first candle and; the third is a bullish candle that opens and closes above the high of the first candle. It points to the likelihood of the stock turning up again.

Three Inside Down: It is a bearish reversal pattern that emerges after an uptrend and is made of 3 candles. The first is a long upward noting a bullish candle, the second is a short candle that is noted to be bearish, appears within the body of the first candle and the third is an extra long bearish candle that closes below the first candle’s low. I believe that it indicates a potential bearish reversal on the downside.

Conclusion

Understanding various candlestick patterns is a crucial that no ambitious equity trader should lack. Accounting for such patterns is helpful knowing market sentiment, searching for exit signals, Signs of Reversals, or Signals of Continuation for better decision-making. Naturally, it does not matter whether you are studying single track, double track or multiple track candlestick patterns; improvements on how these formations are interpreted adds depth to your trading plan.

This implies that even though these candlestick patterns have a huge strength on their side, they do not have to be used alone. Applying them with other technical signals and having a proper setup of risk management can potentially enhance the chances of profitable operations even more. Like with any branch of trading, it will be important to persist and apply similar set of rules to learning when it comes to the use of the candlestick charts as well.