The invention of candlesticks must be one of the most fascinating incidents in stock market history. Muneshisa Homma, a rice merchant from Sakata, Japan is considered to be the father of candlesticks. What was used to document the demand, flow, and pricing of varieties of rice is today used globally to study capital markets and invest accordingly.
How Candles are formed?
Candles describe the price action of an investment instrument in a given timeframe. The time period shows the ‘open’, ‘high’, ‘low’, and ‘close’ on a candlestick.
Open – shows the first trade of the day or as per selected time period
High – the highest price achieved
Low – the lowest price reached
Close – shows the last trade of the day or as per selected time period
The body of the candlestick represents the ‘Open’ and ‘Close’ range.
Wick represents the intra-day high and low
Colors represent the market direction, green (or white) shows price increase and red (or black) show a decrease in prices
Patterns or formations take place between the ongoing price-action and are useful for spotting potential market reversals.
Single Candlestick Formations
Below are a few types of candlestick formations,
The Hammer:- Bullish reversal pattern formed during a downtrend, shows that the current trend is about to end and prices will reverse.
Inverted Hammer: – Bullish reversal pattern also found during a downtrend, shows that current trend will likely reverse.
Hanging Man:- Bearish reversal pattern formed during an uptrend, shows sellers are accumulating and the current price-action has reached a resistance. A downtrend is likely after this.
Shooting Star: Bearish reversal pattern identical to the inverted hammer but formed during an uptrend and is a definite bearish sign
Double Candlestick Formations
Bullish Engulfing pattern: is a two candle reversal pattern indicating a strong bullish move. These are formed during a downtrend where a bearish candle has a large bullish candle next to it
Bearish Engulfing pattern: is the opposite of the bullish engulfing pattern and is formed during an uptrend where a bullish candle has a large bearish candle next to it.
Tweezer Bottom and Tweezer Top: Two candle reversal patterns that indicate trend reversal. Candle 1 mimics the ongoing trend and the next candle shows the complete opposite, while the shadows of both candlesticks are nearly equal. Tweezer bottoms have the same lows and are formed during downtrends and Tweezer tops have the same highs and are formed during uptrends.
Triple Candlestick Formations
Morning Star: is a triple candle bearish reversal pattern. This shows the end of a trend with candle 1 forming a large bearish candle, candle 2 having a small body indicating indecision and candle 3 is a large bullish candle indicating a trend reversal.
Evening Star: is a triple candle bullish reversal pattern, the formation is the exact opposite of morning star.
Three White Soldiers is a bearish reversal pattern. Three simultaneous long bearish candles are formed during a downtrend indicating a reversal.
Three Black Crows is a bullish reversal pattern. Three simultaneous long bearish candles are formed in an uptrend indicating a reversal.
The above are the ones commonly used and known, however, candlestick pattern is a broad subject with many different patterns discovered over the years. The deeper one goes, the more enjoyable and predictable deciphering price-action gets.
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