At first glance grapes and candlestick patterns look daunting and indecipherable, however, they’re an integral part of trading and the stock market. Candlestick patterns are something all traders need to understand and pay attention to.
Traders who understand candlestick patterns can make informed business decisions by examining the patterns that will help predict the direction of price.
What are candlesticks:
When you strip indicators, such as moving averages, away from a price chart you’re left with that’s called Naked Price Action, which is simply, the candlesticks by themselves.
A candlestick chart shows the price action over a set period of time, whether it’s the whole trading day, an hour, or even just a few minutes. Each chart will have multiple candles, which each represent the time frame, for example, if looking at a daily chart, each candle will represent a day of trade. The color and wicks on the candle will illustrate the price action.
A bullish candle means that the price increased over the selected period of time. Bullish candles are usually represented with a green or white body. The bottom of this type of candle represents the opening price of the time period, and the closing price can be found at the end.
A bearish candle is the opposite of bullish candles. Bearish candles mean that the price decreased over the time period. Bearish candles are usually depicted as red or black. When it comes to the price action of the opening and closing periods of time, bearish candles are like an upside-down version of a bullish candle. The opening price can be seen at the top of the candle, and the closing price at the base.
However, the real body of the candle, whether it’s white/green or red/black is not the only information that can be read from candlestick patterns. While not every candle will have a wick, the majority of them do which is why it’s important to familiarise yourself with the term and what they mean. The wick, also known as the shadow or tail, of the candle, provides additional information on price action. This is a line coming out of both sides of the candle which shows the highest and lowest price of the timeframe. If, for example, a candle represents an hour, the wick from the top might represent high price action within that hour which didn’t hold long enough to be the body of the candle, the same applies to wicks at the base. The length of the line is also important, how long or short it is can be an indicator that there was resistance to the price from either buyers or sellers. The line coming from the top of the candle represents the peak price for the period while the bottom shows the lowest point, this is the same for both bearish and bullish candlesticks.
Some candles are neither bullish nor bearish as they have no real body, this type of candle pattern is referred to as a Doji candle. A Doji candle means that the candle opened and closed at the exact same or close to the exact same price. Although the price may have fluctuated during the time period, as it did not stay within that range long enough to meet the closing period selected, it does not warrant a full body.
Trends to keep an eye on
Candlesticks can be a helpful way to identify trends during trading.
As mentioned earlier, some candles don’t have a wick, and these candles together represent a trend, but the wicks can still be signifiers of a trend too.
There’s more to candle patterns than simply whether there are a lot of bullish or bearish candles, the overall pattern provides vital data too.
Several types of trends and shaped graphs can be observed. Different trades use their own names for trends, it’s easier to understand when you pick or use a name that paints a picture for you. For example, the Crow trend is a clever name for a long-lasting consistent drop in the candlestick pattern.
Here are some other patterns to keep an eye on:
- The Supernova:
The supernova refers to a quick spike in price action, largely bullish candles, which drop back down again. These types of candlestick patterns are largely unpredictable.
- The Stair Stepper:
The Stair Stepper is exactly what it sounds like, gradual steps in an upward trend. While there may be some bearish candles along the way, overall, this is a slow but steady increase in price.
- The Snore:
The Snore is not an ideal pattern for traders to find themselves experiencing. This pattern is unpredictable and characterized by little to no price mobility.
- The Shooting Star:
The name shooting star may suggest it’s akin to the stair stepper but this pattern is found at the peak of an upward trend. When there are three or more rising candles in a row with large wicks at the top, and then a falling candle with a wick at the top at least double the length of the body, then you’ve found yourself in a shooting star.
- The Hammer/Dragonfly Doji:
As a Doji is the result of similar or the exact same opening and closing prices, a hammer or dragonfly Doji can be found at the bottom of a downward trend. It can signify that the price could begin to rise.
- The Inverted Hammer Candle:
This pattern looks like a hammer that’s upside down and resembles a shooting star pattern. The difference is that the inverted hammer is a bullish trend. This trend is also noticed after the pattern has spiraled downwards, and can signify a bullish reversal.
- The long-legged Doji
A long-legged Doji is exactly what the name suggests; the Doji trend has long wicks above. It can mean that supply and demand are coming together.
- The Gravestone Doji
The grimly named Doji can arrive before a bearish pattern pulls the price downwards. Gravestones have long upper shadows which indicates that a trend that began bullishly is now bearish.
Where to read them:
Having now gathered the knowledge required to understand stocks and price action, whether you’re a trader or interested in learning the craft.
Most are free to use with the option to upgrade for more features, this includes TradingView, StockCharts, Google Finance, and Yahoo! Finance.