Types of Bullish and Bearish Candlestick Patterns

Types of Candle Stick Patterns

The use of candlestick patterns for analysis of the stock market first began in Japan in the 17th century. Then came the US version of analysis which is used by many. Even though the methods are a little different from each other, the guiding principles for these methods are similar. They are as follows:

  1. The price action of the stock is more important than other factors affecting it, such as news, earnings, etc.
  2. Market movements happen based on expectation and emotions
  3. Markets are bound to fluctuate
  4. The actual price of the stock may not indicate the underlying value of the stock.

A candlestick pattern is the movement of the prices of the stocks as per their movement in the market. The candlestick is the graphical representation of this movement. Many modifications have been made to these initial versions to reach the method we use today. Before we move on to the types of candlestick patterns, here is the terminology you should know.

  1. Open- Opening Price
  2. Close- Closing Price
  3. High- highest price over a fixed period of time
  4. Low- Lowest price over a fixed period of time

Candlestick Pattern Terminology

Here we list down the types of candlestick patterns which traders use to catch the trend and momentum of the market.

1. Bullish Candlestick Patterns

I. Bullish Hammer

Identification:

  • Downward trend
  • Candlestick with a small body at the upper end
  • Lower shadow of the candlestick is twice as long as the body
  • Almost to none upper shadow

Interpretation:

When a bullish hammer appears, it means that there is a sharp sell-off during the trade. Once the decline ends, the price of the stock returns to the high on that particular day. Such a price movement reduces the bearish sentiment for the traders and makes the situation better for bull traders.

Buy Stop/Loss Levels:

The prices of the stock should cross the top of the hammer’s body. This can be the level to initiate a buy signal. The low of the candlestick pattern is the stop/loss level.

II. Bullish Belt Hold

Identification:

  • Characterized by the existing downward trend
  • The market opens at low and closes at high
  • No lower shadow

Interpretation:

There is a significant gap in the direction of the existing downward trend. It is observed that as soon as the market opens at the low, there is a rapid change in the sentiments. From there on the market moves in the opposite direction.

Stop/Loss Levels:

The last close is the confirmation level. For the buy signal to be generated, the prices must cross this level. The low of the candlestick pattern is the stop/loss level.

III. Bullish Engulfing

Identification:

  • An existing downward trend of the market
  • Red candlestick body on day one
  • The green body is seen on the send day. It engulfs the entire red body from the day prior.

Interpretation:

With the downward trend, selling is observed in the market with an occurrence of the red body on day one. The selling is in light volumes. On day two, the market opens lower; the bulls take control. Buying overcomes selling, and the market closes above the open from the previous day.

Stop/Loss Levels:

When the price moves above the second candle’s close, then the buy signal is generated. The low of the candlestick pattern is the stop/loss.

IV. Bullish Harami

Identification:

  • Downward existing trend
  • Red candlestick on first days
  • Red candlestick engulfed by green on the next day

Interpretation:

Here, the market is in a downward trend, in a bearish mood. The level of selling is very heavy. On the next day, the price opens higher or at the close of the previous day. This leads to a covering of short positions which further leads to an increase in the price. This may lead to a trend reversal.

Stop/Loss Levels:

The last close or the midpoint of the red body, whichever is higher, is the confirmation point. For the buy signal to be generated, the prices need to cross this level. The stop/loss is defined as the lowest point among the two candles.

V. Bullish Doji Star

Identification:

  • Existing downward trend
  • Red candlestick on day one
  • A Doji on the second day

Interpretation:

In a bullish Doji, it is confirmed that the market is in a downward trend. The market opens at lower with a gap. The trades are done in a small range. The closing and opening prices are similar, forming a Doji. Here it shows that the bulls and the bears are in equal control. It is not advisable to short at the current level.

Stop/Loss Levels:

The midpoint of the gap between the Doji and the previous day’s candlestick is the confirmation point. For a buy signal, the prices need to cross this level. The lowest point of the two candles is the stop/loss.

VI. Bullish Morning Star

Identification:

  • Existing downtrend
  • Red candlestick on the first day
  • A short candlestick on the second day. This candlestick gaps in the direction of the downtrend
    Green candlestick on the third day

Interpretation:

The red candlestick on day one confirms the downtrend of the market. The appearance of the short candlestick with a gap indicates the continuation of the downward trend. This also indicates indecision on the second day. On the third day, with the emergence of the green candlestick, there is a reversal in the trend.

Stop/Loss Levels:

The last close is the confirmation level. Once the prices cross above this level, the buy signal is generated. The lowest point on the candlestick is the stop/loss.

VII. Bullish Morning Doji Star

Identification:

  • The market is in an existing downward trend
  • Red candlestick on day one
  • On the second day is a Doji with a gap
  • On the third day is a green candlestick

Interpretation:

There is an in-progress downtrend that the red candlestick confirms on the first day. There is a narrow price action between the open and close variants, and hence it shows indecision. On day three, the body of the green candlestick is above the red candlestick and closes well into the red candlestick.

Stop/Loss Levels:

The last close is the confirmation level, and the prices need to cross above this level for a buy signal. The stop/loss level is the lowest point of the candlestick.

VIII. Bullish Piercing Line

Identification:

  • The existing downtrend in the market
  • The appearance of a red candlestick on the first day
  • The second day sees a gap down opening, yet the candlestick manages to close a wider gap halfway into the body of the first candle.

Interpretation:

The appearance of the first red candlestick confirms the downtrend of the market. The market opens on bearish on the next day. This opening of the market gives bulls the chance to take charge. The market sees a surge and closes above the previous day’s close.

Stop/Loss Levels:

The last close is defined as the confirmation level. This is the level the prices need to cross for the buy signal to be generated. The stop/loss is the lowest point of the candlestick.

2. Bearish Candlestick Patterns

I. Bearish Hanging Man

Identification:

  • The market is in an existing uptrend.
  • The body of the candlestick is smaller, and the length of the lower shadow is twice as long.
  • Almost to none upper shadow

Interpretation:

The bearish hanging man is a reversal pattern. Such a pattern usually occurs after an advance or resistance level in the market. This indicates that there is a high pressure to sell in the market, and it is increasing as well. The long lower shadow indicates the fall in the prices. If the candlestick body is red, then it means the close could not get back to the price level.

Stop/Loss Levels:

The midpoint of the Hanging man’s lower shadow is the confirmation level. The prices have to cross below this level for a sell signal to be generated. The high point of the candlestick is the stop/loss level.

II. Bearish Belt Hold

Identification:

  • A red Marubozu in the upward trend
  • Market gaps up, opens at a higher price, and closes near the low of the day
  • Red candlestick body with no upper shadow

Interpretation:

The market opens on a high but soon the situation changes, and it goes in the opposite direction. Here, the bulls close their position, which makes the sell-off apparent.

Stop/Loss Levels:

The last close is the confirmation level. The prices need to fall below this lose for a sell signal to be generated. The highpoint of the candlestick pattern is the stop/loss level.

III. Bearish Engulfing

Identification:

  • Existing uptrend market
  • Green body candlestick pattern on day one
  • The appearance of the red candlestick body engulfing the green body

Interpretation:

At the occurrence of the green candlestick on day one, buying is observed on low volumes. The following day, the market opens at a high. The uptrend loses momentum. Selling overcomes buying, and the market closes below the previous day’s open.

Stop/Loss Levels:

The last close is the confirmation level. The prices need to move below the confirmation level for a sell signal. The high point of the candlestick pattern is the stop/loss.

IV. Bearish Harami

Identification:

  • Existing uptrend
  • There is an occurrence of the green candlestick body on day one
  • The red body appears on day two, which is engulfed inside the green body of the candlestick from day one

Interpretation:

The green candlestick body on day one indicates a heavy buying interest. However, the prices open lower on day two, and the trading is done in a small range throughout the day. It closes lower but within the body of the green candlestick from the preceding day.

Stop/Loss Levels:

The midpoint of the green body or the last close (whichever is low) is the confirmation level. The prices need to cross below this level for a sell signal. This highpoint of the candlestick is the stop/loss.

V. Bearish Harami Cross

Identification:

  • A prevailing uptrend in the market
  • Green candlestick body on the day one
  • The appearance of a Doji on day two, which is engulfed by the green body

Interpretation:

The green candlestick on day one supports the uptrend in the market. However, on day two, the market opens low and closes at the price it opened. This indicates indecision in the market.

Stop/Loss Levels:

The midpoint of the body or the last close (whichever is low) is the confirmation level. The prices need to fall below this level for a sell signal to be generated. The high point of the candlestick is the stop/loss.

VI. Bearish Shooting Star

Identification:

  • An existing uptrend in the market
  • Green candlestick pattern on the first day
  • No matter the color, a small body is observed near the lower trading range
  • The upper shadow of the candlestick on day two is twice as long as the body
  • There is no lower shadow

Interpretation:

The bearish shooting star candlestick pattern appears in the uptrend market. On the second day, an inverted hammer is formed where the market opens at/near the low of the day.

Stop/Loss Levels:

The low of the inverted hammer’s body is the confirmation level. For s sell signal, the prices need to cross below the level. Stop/loss is the high point of the candlestick pattern.

VII. Bearish Dark Cloud Cover

Identification:

  • Existing uptrend
  • Green candlestick on day one
  • The appearance of a red candlestick on day two
  • The red candlestick appears with a gap up and closes more than halfway into the body from day one

Interpretation:

The green candle on day one reinforces that the market is in an uptrend. On day two, the market opens at high via a gap. Next, we see that the market sees a correction, and the prices start to fall. This leads to a market close lower than the previous day’s close.

Stop/Loss Levels:

The last close is defined as the confirmation level. The prices need to cross this level for a buy signal. The stop/loss level is the high point of the candlestick.

VIII. Bearish Three Black Crows

Identification:

  • The market is in an uptrend
  • 3 consecutive red candlesticks
  • Each of the 3 candlesticks open with the body of the first day
  • Next day, these 3 candlesticks close at lows

Interpretation:

This candlestick analysis can be done when the pattern occurs at a market high. Here, the first candlestick attempts to move downward. This downward movement persists for the next two days.

Stop/Loss Levels:

The confirmation level is the last close. For a sell signal, the prices need to cross this level. This high the candlestick is the stop/loss.

The above candlestick patterns are something that you will come across once you start analyzing the candlestick charges. Such data is available through many Indian share market apps. Such stock market apps help you to analyze candlestick patterns on the go and time your trade accordingly.

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