This article is a summary of some of the candlesticks pattern to look for to assist in trading. They are by no means the complete set of candle patterns.
Most charting software / applications will have the option to draw the Price vs Time stock graph in candlesticks. So there is no need to draw your own candlesticks.
The main component of the candlesticks are:
(assuming the data is collected daily)
- Highest point represent the highest price of the day
- Lowest point represent the lowest price of the day
- Rectangular Box - the top and bottom of the box represent the opening and closing price of the day. If the closing is at the top of the box, then the price finished the day higher, and vice versa.
- The colour of the box tell whether the closing is higher (green) or lower (red) than the opening price.
- In another scheme:
Green vs Red = Close higher vs lower than the close the day before.
Filled vs Unfilled = Close is higher vs lower than when it opened
Candlesticks are good at providing signals of trend reversal. The various patterns described here are such indicators of trend reversals.
Doji - this is when the opening and closing price is almost the same. The candlestick has almost NO rectangular body. If the trend has been a solid body, then became doji, perhaps it may change direction.
The
gravestone doji is a bearish reversal. This happens at the peak where the price reaches high up but comes back down at the close. Wait for confirmation on the next day after the gravestone doji.
The
dragonfly doji is a bullish reversal. This happens at the bottome where the price reaches further down but comes back down at the close, indicating downward pressure has ceased. Wait for confirmation on the next day after the dragonfly doji.
Spinning Top - a very small body rectangle, with long tail to one side. When there is large movement, there will be a large body. When a body is small such as the case of the spinning top, it means the bears and the bulls are about to be equal in strength. Hence the previous strong trend, is now losing momentum. The doji is the extreme case of this.
Hammer - when the rectangle is at the upper or lower end of the candlestick, with long tail in other direction. For down market turning up, the hammer is upright, meaning the head is on top. For an up market turning down, the hammer head is at the bottom, and the tail is upward.
The Hanging Man - has the same shape as the hammer. The hanging man with head on top, like the hammer. The difference is that the hanging man occurs the market top and indicates it may turn down. Similarly the Hanging Man with the head at the bottom would suggest the market bottom may start to turn up.
Engulfing Pattern - when the next candlestick body is larger than the previous candlestick body AND the colour changes. This indicate an abrupt change in trend.
More to come:
Harami Patterns
Piercing and Cloud Patterns
Soldiers and Crowns
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