Understand Candlestick Patterns In Stock Market Explained

Candlestick patterns are a predictive tool in the stock market, offering a visual insight into the potential future direction of price movements.

Consider candlesticks as the market’s X-ray vision, revealing the underlying dynamics. These patterns, formed by grouping two or more candlesticks, serve as a technical analyst’s toolkit for setting up trades. Interestingly, even a single candlestick can convey powerful signals.

Each candlestick on a chart represents the price information for a specific time frame, whether a day on a daily chart or an hour on an hourly chart.

These visual representations adjust as you change the time frame, offering a dynamic view of market movements.

Understanding the intricacies of candlestick patterns allows you to perceive shifts in market strength, direction, and the influence of emotions on trends.

So, in this blog, let’s understand the parts of candlesticks and explore the 16 common candlestick patterns in stock market, providing you with the knowledge to identify trading opportunities effectively.

What is a Candlestick?

A candlestick displays the price movement of an asset or a stock. It’s a popular way to examine how the price moves over time. Imagine looking at a daily chart where each candlestick tells us what happened in one day of trading.

Each candlestick has three main parts –

  • The body – It shows where the price started and where it ended during the day.
  • The wick or shadow – This little part tells us how high and low the price went during the day.
  • The color – If the body is green or white, it means the price went up. If it’s red or black, it means the price went down.

As time goes on, these candlesticks make patterns. Traders use these patterns to determine important levels where the price might stop going up or down. 

There are many different patterns, and each one gives traders clues about what might happen next in the market – some provide insight into the balance between buying and selling pressures. In contrast, others help traders identify market indecision and continuation patterns.

Read More: Simple Exit Trading Strategies to Exit Trades Sensibly

How to Read Trading Candlestick Patterns

A daily candlestick represents a market’s opening, high, low, and closing prices (OHLC). Its rectangular body is either dark (red or black) for a price decrease and light (green or white) for an increase.

The lines above and below are known as wicks or tails, showing the day’s highest and lowest points. These components often indicate shifts in market direction or potential significant moves. Confirmation usually comes from the next day’s candle!

Types of Candlestick Patterns In Stock Market

1. Bullish Candlestick Patterns

Bullish patterns are like signals in trading, indicating a potential upward reverse in the market after a downtrend. Traders might see these patterns as opportunities to open long positions and benefit from a rising market.

There are 6 types of trading candlestick patterns for Bullish trading – 

  • Hammer
Hammer

Source:ig

This pattern shows up after a downward trend and has a short body with a long lower wick. It indicates that strong buying pressure pushed the price back up despite selling pressure. Green hammers suggest an even stronger bullish market.

  • Inverse Hammer
Inverse Hammer

Source:ig

Similar to the hammer, but the upper wick is long while the lower wick is short. It suggests buying pressure followed by weak selling pressure, hinting that buyers might take control soon. This selling pressure was not enough to drive market prices down.

  • Bullish Engulfing
Bullish Engulfing

Source:ig

This pattern involves two candlesticks. The first is a short red body completely covered or engulfed by a larger green candle. Despite opening lower, the bullish market pushes the price up, a clear win for buyers.

  • Piercing Line
Piercing Line

Source:ig

Another two-stick pattern with a long red candle followed by a long green one. It usually opens with a significant gap down between the first candlestick’s closing price and the green candlestick’s opening. This indicates strong buying pressure that pushes the price up, even above the mid-price of the previous day.

  • Morning Star 

Seen as a sign of hope in a declining market, it’s a three-stick pattern – a short-bodied candle between a long red and a long green one. The ‘star’ doesn’t overlap with the longer bodies because the market gaps both open and close. This further signals a shift from selling pressure to an emerging bull market.

  • Three White Soldiers

This three-day pattern consists of consecutive long green candles opening and closing progressively higher than the previous day. It’s a strong bullish signal, indicating a steady rise in buying pressure after a downtrend.

2. Bearish Candlestick Patterns

Bearish candlestick patterns often show up after a market has been rising, indicating a point of resistance. When traders feel quite negative about the market, they often close their long positions and might even open short positions to benefit from the falling prices.

There are 6 types of trading candlestick patterns for Bearish market –

Hanging Man 

Hanging Man

Source:ig

This pattern is like a bearish version of a hammer, the same shape but formed at the end of an upward trend. It shows that there was a significant sell-off during the day, but buyers managed to push the price up again. The big sell-off is a signal that the bullish control might be slipping.

Shooting Star 

Shooting Star 

Source:ig

Similar to the inverted hammer but forms in an uptrend. It has a small lower body and a long upper wick. The market usually opens a bit higher, rallies to a high, and then closes just above the open, resembling a star falling.

Bearish Engulfing

Bearish Engulfing

Source:ig

This trading candlestick pattern happens at the end of an uptrend, where the first candle has a small green body completely engulfed by a subsequent long red candle. It suggests a peak or slowdown in price movement, indicating an upcoming market downturn. The lower the second candle goes, the more significant the trend will be.

Evening Star 

Evening Star 

Source:ig

This three-candlestick pattern is the opposite of the bullish morning star. It consists of a short candle between a long green one and a large red one, signaling a reversal of an uptrend, especially strong when the third candle erases the gains of the first.

Three Black Crows 

This pattern involves three consecutive long red candles with short or no wicks. Each session opens similarly to the previous day but keeps closing lower due to selling pressure. It indicates the start of a bearish downtrend because sellers have overtaken the buyers during three successive trading days.

Dark Cloud Cover

Source:ig

It’s a black cloud over the previous day’s optimism, indicating a bearish reversal, and involves two candlesticks. The first is a red candlestick opening above the previous green body and closing below its midpoint. It signals that bears have taken over, pushing the price sharply lower, especially if the candle wicks are short, showing a decisive downtrend.

3. Continuation Candlestick Patterns

If a candlestick pattern doesn’t suggest a change in the market direction, it’s a continuation pattern. These patterns help traders spot a time when the market takes a break, showing indecision or neutral price movement.

Here are the 4 continuation candlestick patterns in stock market – 

DOJI

Source:ig

When a market’s open and close are nearly at the same price point, the candlestick looks like a cross. Traders must look out for short to non-existent bodies with varying-length wicks.

It signals a struggle between buyers and sellers, resulting in no clear win. While a Doji alone is neutral, it can be part of reversal patterns like the bullish morning star or bearish evening star.

Spinning Top

This pattern has a short body between equal-length wicks, indicating market indecision. It suggests no significant price change – bulls push the price up, and bears bring it down. Spinning tops often signal a rest period after a significant uptrend or downtrend, hinting at potential future market changes. It signifies that current market pressure is losing control.

Falling Three Methods

Source:ig

This pattern is used to predict the continuation of a current trend, be it bearish or bullish. This bearish pattern is the fallen three methods – includes a long red body, followed by three small green bodies, and another red body, all contained within the range of the bearish bodies. It suggests that the bulls lack the strength to reverse the trend, indicating a continuation of the bearish trend.

Rising Three Methods

Source:ig

This is for a bullish counterpart with three short reds within the range of two long greens. Despite some selling pressure, it shows buyers are holding control of the market, pointing towards continuing the bullish trend.

Read More: Mutual Funds vs PPF: Which is better form of investment

Take Special Note of Long Tails and Small Bodies

Small Body

When candlesticks have a small body, like a DOJI, it means that buyers and sellers had a bit of a tug-of-war, and the closing price ended up very close to the opening price. 

  • Sometimes, this small-bodied candlestick can also look like a spinning top. 
  • Small bodies show that the market is undecided about its current direction.
  • This often hints that small-bodied candlesticks might be signals of a reversal. 
  • It’s like the movement (up or down) might be losing its energy. 

Paying attention to these candles is crucial because, sooner or later, either the bulls (buyers) or the bears (sellers) will come out on top. This is a time to be patient and observe how the prices are behaving, getting ready to move once the market shows how it’s going.

Long Tails

Another important candlestick signal to watch for is long tails, especially when they accompany small bodies. Long tails show that buyers or sellers tried hard to push the price in their direction but failed, and the price ended up close to where it started.

For example, the DOJI pattern indicates an attempt to go higher and lower but ends with no change. This happens after an upward move, suggesting that the next move might be downward.

Final Verdict

Overall, Trading Candlestick Patterns are a technical tool with data for multiple time frames into single price bars. These are more useful than traditional OHLC bars – open, high, low, and close. 

They help predict price directions and are useful to understand the overall market during trading.

But, though they are useful for traders, it’s essential to avoid common mistakes. 

  • Over-relying on these patterns without considering other essential factors like market trends and economic news can result in missed opportunities or losses.
  • Additionally, misinterpreting candlestick patterns is a pitfall, as not all patterns are reliable indicators, and some can be misleading. 
  • Traders should adopt a well-rounded approach that integrates multiple indicators and considers the broader market context to make informed decisions. 

The Candlestick patterns in stock market are versatile and applicable across various markets, including stocks, forex, and cryptocurrencies.

They can aid in identifying trends and potential reversals, providing valuable insights for anticipating market movements. To learn how to read these trading candlestick patterns in stock market, what to consider, and what to avoid, explore Upmarket Academy’s free course for trading.

Stay in Touch

Subscribe for Latest Updates and Knowledge related to Stock Market

Related Articles