Personal Finance

What is a Candlestick Pattern

February 14, 2021

What is a Candlestick Pattern

To put it out in an easy way, a candlestick pattern typically is a movement in prices which is shown graphically on a candlestick chart. Several believe that this pattern can predict a particular market movement.

Candlestick charts are usually used by traders, investors to determine or predict a possible price movement based on past patterns.

This kind of pattern is useful during trading as they show four price points (open, close, high, and low) throughout the period of time the trader specifies.

Candlesticks are created by up and down movements in the price. While these price movements sometimes appear random, at other times they form patterns that traders use for analysis or trading purposes

Mastering this art of reading the candle pattern will require your time and patience, but once achieved it can help you immensely. There are hundreds of candlestick patterns that exist, but obviously, you cannot look for all these patterns in the chart.

How Did It All Began

Dating back to over 100 years ago, the candlestick pattern originated in Japan much before the West developed the bar and point-and-figure charts. Back in the 1700s, a Japanese man named Homma discovered the same and claimed while there was a link between price and the supply and demand of rice. The markets were strongly influenced by the emotions of traders.

Similarly, Candlesticks show that emotion by visually representing the size of price moves with different colors. Traders use candlesticks to make trading decisions based on regularly occurring patterns that help forecast the short-term direction of the price.

Characteristics and Components

The body of the candle represents the open-to-close range, whereas the wick, or shadow displays the intra-day high and low. The colour, usually depicts the direction of market movement – a green (or white) body indicates a price increase, while a red (or black) body shows a price decrease.

Similar to that of a bar chart, a daily candlestick shows the market’s open, high, low, and closing price for any particular day. The candlestick has a wide part, which is termed as the “real body.”

This real body represents the price range between the open and close of that day’s trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the close was higher than the open.

How To Read This Pattern

A chart that has open, close, high, and low data in a candle form for any selected period is a candlestick chart. rising periods (when the closing price is greater than the open price) will be represented by a green candlestick body called a Bullish candle.

Falling periods (when the closing price is lesser than the open price) will be represented by a red candlestick body called a Bearish candle.

The Difference Between Bar Charts And Candlestick Pattern Charts

While both the bar chart and the candlestick charts depict the same information they just do that in a different way. Candlestick charts are comparatively more visual, due to the colour-coding of the price bars and thicker real bodies, which are better at highlighting the difference between the open and the close.

List of Bullish Candlestick Patterns

Hammer

This kind of pattern is formed of a short body with a long lower wick and is found at the bottom of a downward trend.

Inverted Hammer

In the case of an inverted hammer, there is a similar pattern. However, the only difference being that the upper wick is long, while the lower wick is short. The inverse hammer suggests that buyers will soon have control of the market.

Bullish Engulfing

The bullish engulfing pattern is the one that is formed of two candlesticks. The first candle is a short red body that is completely engulfed by a larger green candle.

Piercing Line

The piercing line is also a two-stick pattern, made up of a long red candle which is then followed by a long green candle.

Morning Star

The morning star candlestick pattern is considered to be a hope where there is a downtrend in the market. It is a three-stick pattern: one short-bodied candle between a long red and long green.

Three White Soldiers

The three white soldiers pattern happens over a span of three days. It consists of consecutive long green candles with small wicks. These open and close progressively higher than the previous day.

A Few Examples Of Bearish Patterns

Hanging Man

The hanging man pattern is bearish similar to that of a hammer; it has the same shape but forms at the end of an uptrend.

Shooting Star

The shooting star is similar to that of the shape of an inverted hammer, it is however formed in an uptrend. It also has a small lower body and a long upper wick.

Evening Star

The evening star has a three-candlestick pattern and is quite like the bullish morning star. Its formation consists of a short candle sandwiched between a long green candle and a large red candlestick.

Conclusion

No amount of patterns can outrun the uncertainty principle. There are no written rules that these should always work, like any technical analysis these too would show their error percentile