Guide to Understanding and Analyzing Candlestick Patterns

Analyzing Candlestick Patterns

When it comes to stock market trading, technical analysis is something every trader has to do. Without analysis and research, it impossible to strategize and make the next move in trading. There are many indicators that help traders analyze the movement of prices and trends in the market. Of those, Candlestick pattern is what is preferred by many traders. There are many stock market apps that help traders analyze candlestick patterns. Here we help you understand how you can analyze candlestick patterns.

What is Candlestick Pattern?

In technical analysis of stocks, a candlestick pattern is the movement of the prices which are shown graphically on a candlestick chart for a given period of time. Many traders believe that this chart can predict the market movement.

A candlestick in a day chart has 3 basic features. They are as follows:

  • Body
    The body represents the open to close range.
  • Wick
    The wick or also known as a shadow indicates the high-low-in intraday trading.
  • Color
    The color reveals in which direction the market is moving. The color green of the body indicates an increase in price. The color red of the body indicates a decrease in price.

A single candlestick pattern is formed by the trading signal from one day’s trading only. If the trader is able to identify the pattern, then it can be a profitable day if executed correctly. While analyzing candlestick patterns one needs to observe the length of the candle. It signifies the range for the day. If the length is long, the intensity of buying and selling is high. If the length is short, then once can conclude that the trading was subdued.

Before you start your analysis, it is important to know the basic candlestick patterns. Here we have listed 3 basic candlestick patterns and how to analyze them.

1. Marubozu

A Marubozu is a candlestick with only a body and no shadows. Marubozu in Japanese means ‘bald’ and hence it’s the name for the candlestick with no shadows at all. A Marubozu can be upward or downward. There are two types of Marubozu candlesticks.

i. Bullish Marubozu

A bullish Marubozu is a blue or green candle. The absence of the shadows both upper and lower in bullish marubozu indicates that the low is equal to the open and the high is equal to the close. This means there is a high interest in buying the stock in a day. A trader can observe a bullish marubozu when he/she wants to buy the shares. The buying price of the share should be around the closing price of the Marubozu.

  • Stop/Loss in Bullish Marubozu
    A stop/loss is an order which is places to buy or sell a stock once it reaches a certain price. In a bullish Marubozu, the low of the stock acts as a stop/loss. Once you initiate the trade and then you find the market is moving in the opposite direction then you should exit the stock. This is because the price breaks the low of the Marubozu.

ii. Bearish Marubozu

As the name suggests, a bearish Marubozu indicates extreme bearishness in the market. The open is equal to the high and the close is equal to the low. Here it indicates that there is too much pressure to sell the stocks which close near the low point of the day. Here the trader should look at shorting opportunities. The sell price of the stock should be around the closing price of the price of marubozu.

2. Spinning Top & Dojis

Unlike Marubuzo which gives a signal to the trader to enter or exit the trade, a spinning top informs the trader regarding the current situation of the market. When you keenly observe a spinning top you might see two prominent things:

  • Small body
  • Almost equal lower and upper shadows

The small body indicates that the open and close prices of the stocks are close. For e.g. the open price of a stock would have been 200 and the closing would have been 203. This shows that there has been no drastic movement in the stock.

The upper shadow of the candle indicates the high point of the day. If the color of the candle is red, then the high price and open prices are connected and if it is blue or green then high prices and close prices are connected. The upper shadow helps the trader understand that it was attempted by traders to get the market higher; but the attempt failed. In case of success, the body of the candle would have been longer.

The lower shadow connects the body to the lower point of the day. Here if the color of the candle is red then the low and close are connected. If the color of the candle is blue or green, then the low and open are connected. Here it indicates that the traders tried to take the market to the lower level and failed.

When it’s a Doji then it means that the candlestick has an almost non-existent body. Here the open and close prices are equal. Here the upper and lower wicks can be of any length. Spinning top and Dojis indicate that there is indecision in the market.

3. Paper Umbrella

The paper umbrella is a single candlestick. This helps the traders to set up directional traders. This candlestick pattern has two trend reversal patterns. They are as follows:

i. Hammer Formation

If the paper umbrella appears at the bottom end it is called the ‘hammer’. The bullish hammer is a pattern that occurs at the bottom of the trend. It has a small body at the upper end of the trading range and a long lower shadow. The hammer suggests a long trade.

ii. Hanging Man

When the paper umbrella appears at the top end of the trade then it is a ‘hanging man’. This signals that the market is in an upward trend.

The above basic candlestick patterns can be a starting point for traders who have will use the candlestick analysis for the first time. These patterns have their own learning and takeaways which the traders can use in their trading strategies. Indian share market apps can be helpful when it comes to getting hands-on information about the candlestick charts.

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