Candlesticks Simplified

INTRODUCTION TO CANDLE STICKS:

Candle stick charting is one of the most preffered technical analysis tool , as candle sticks helps you analyse the emotions of the traders graphically by just looking at candles. Though these techniques have come from Japan, it was given popularity by Steve Nison, who hails from America. Let us look at the basics of how candle stick is formed through this image:

There are 2 types of Candlestick patterns - Reversal Patterns and Continuation patters, but we will concentrate only on Reversal patterns, as these are the prominent one's used in markets, and also comprise of the majority of the patters.

Note - (Reversal patterns means those patterns which shows you reversal, i.e after stock has increased from 100 Rs to 120 Rs, and now you see a bearish pattern, so stock will reverse now, that is fall or correct and same vice versa).

Candles which are Green and White signifies Bullish or Positive closing of stock, Candles which are Red and Black signifies Bearish or Negative closing normally, though the colour can be changed as per your wish. Here, while explaining I will use Black for bearish candle, and White for bullish candle.

CANDLE STICK PATTERNS:

1) Bullish Hammer Pattern:

Bullish hammer pattern is formed when the stock is coming down and suddenly you see a Hammer like formation at the bottom of the bear run. It typically looks like a hammer as shown in the image. The hammer should be white, but it can also be black. Once the hammer is formed, one should wait for confirmation of the next day's candle, if it is white, then we can be confident that the trend has changed and now we can go bullish.

2) Bearish Hanging man Pattern:

It looks same like Hammer but the only difference is it is formed after stock has moved up. The hanging man should be black in colour, but if its white its fine. Once the hanging man is formed, one should wait for the confirmation of the next day's candle, if it is in black, and the stock corrects, then we can be confident that the trend has changed and now we can be bearish on the same.

3) Bullish Engulfing Pattern:

In Bullish Engulfing pattern, after a down trend, you see a  white candle stick real body, totally engulfing the earlier preceding black candle real body. The shadows are not important here, just you have to see that the white body of the candle engulfs last preceding black candles real body in it. (In simple terms, white body-black body ko kha jata hai). Here also after bullish engulfing pattern, you can take confirmation only if the next day candle is white and the stock starts moving up.

4) Bearish Engulfing Pattern:

In Bearish Engulfing pattern, after an uptrend, you see a black candle stick real body, totally engulfing the earlier preceding white candle real body. The shadows are not important here as well, the only thing important is that black body of the candle engulfs the last preceding white candle real body in to it. (In simple terms, black body-white body ko kha jata hai). Here also after bearish engulfing pattern, you can take confirmation only if the next day candle is black and the stock starts moving down.

5) Bullish Harami Pattern:

In Bullish Harami pattern, after a down trend, you see a small white real body contained within a prior relatively large black real body. This is sort of inverse of Bullish Engulfing as in Bullish engulfing, white body contains the black body, but here black body contains the white body. Confirmation can be taken next day in form of white candle stick.

6) Bearish Harami Pattern:

In Bearish Harami pattern, after an uptrend, you see a small black real body contained within a prior relatively large white real body. This is sort of inverse of Bearish Engulfing , as in Bearish engulfing, black body contains the white body, but here white body contains the black body. Confirmation can be taken next day in form of black candle stick.

7) Bullish Piercing Line:

In Bullish Piercing Line, you see a stock in a downtrend, and after a long black candlestick, next day we see a gap down (candle opening lower than yest's close), but the stock closes in white covering more than 50% of previous days black candle body. This is a very strong pattern, and confirmation is not required, but if taken, its an added advantage.

8) Bearish Dark Cloud Cover:

In Bearish Dark Cloud cover, you see a stock in an uptrend, and after a long white candlestick, next day we see a gap up (candle opening higher that yest's close), but the stock closes in black covering more than 50% of previous days white candle body. This also is very strong pattern, and confirmation is not required, but if taken, its an added advantage.

9) Bullish Morning Doji Star:

This is a three-candlestick formation signalling a major bottom reversal. In a down trend, it is composed of a long black candlestick followed by a doji, which characteristically gaps down to form a doji star. Then we have a third white candlestick whose closing is well in to the first sessions black real body. This is a meaningful bottom pattern.

10) Bearish Evening Doji Star:

This is a major top reversal pattern formed by three candlesticks. In an uptrend, you see the first candlestick is a long white body, the second is a Doji, characterized by a higher gap thus forming a Doji star. The third one is a black candlestick with a closing price, which is within the first day's white real body. It is a meaningful top pattern.

This are important candlestick patterns, which can be really helpful to find out reversals. Some more good candlestick patterns are there, but would update after exams. Diagrams are easy, do draw it.

Image Source- @candlesticker.com