The most widely used patterns of charts are candlesticks charts. Due to its advantages over other chart patterns, it becomes important that we understand them. So without consuming enough time, let’s jump into understanding what are candlesticks.
A candlestick, as the name suggests is made of candles. The candles themselves can represent if it’s a bullish or bearish candle. Typically, 1 candle contains the following information. Open price, the highest price for the time range, lowest price for the time range, closing price, and finally if the closing is above the opening price or not. Below is an example:
If we look at the green candle, we can very well see that it has an opening at a certain level, went all the way high to its highest level, went all the way down to its lowest level, and finally closed at a certain level. By looking at just this 1 candle, we can say that closing is higher than the opening for this time period. Hence this candle is a green candle. A green candle depicts bullishness or buying pressure. Opposite of a Green candle, a red candle depicts selling pressure or bearishness.
In the next candle (red candle), notice how the open was above the close. That means the close price is lower than the open price for that time range and hence the candle is a red candle. Of course, it will have a high and a low as well similar to the previous green candle.
The candlesticks or any chart type can be used as per our convenient time frame. For example, We can see 15 minutes, 1 hour, 1 Day, or 1-month charts using candlesticks. The candlesticks were first used by Japanese traders to quickly identify how the asset has performed for the time frame. As we go further in this section, we will see how a single candle can give you indications based on which you can make your trading decisions.
Let’s take an example from the live market to see how the candles look on a trading platform. In the image below, see the last 2 candles from the right. I want you to focus on Open, High, Low, and Close for the green candle. The image includes the current value at the extreme high and you can also relate it with the numbers given at the top right.
Now that we have a basic understanding of candlestick, it’s time to deep dive into details and finds out different patterns of the candlestick and what they signify.
Identifying Various Candlesticks patterns
Marubuzu – A marubuzu is a Candlestick pattern that has just the real body and no or very small high or low tail. The Marubuzu candle can be a bullish Marubuzu or bearish Marubuzu. A marubuzu candlestick, be it a bullish marubuzu or bearish Marubuzu, both represent strong buying or selling pressure. It does make sense to say that Marubuzu represents strong sentiments. Considering the example of a bullish marubuzu, the absence of a lower tail represents that the opening price was the lowest price. The absence of a higher tail represents that it closed on the peak. That means, once the candle formation started, there was no turning back and close was the highest peak. Hence a strong bullish market sentiment. Similarly, in a bearish marubuzu, the open was the highest peak. Then there was no turning back and closing was at the lowest point. Hence a strong bearish sentiment. Have a look at both bullish and bearish marubuzu in the picture below.
On the appearance of a bullish marubuzu, one will think to go in a long (buy) position. On the appearance of a bearish mrubuzu, one might think of a short (sell) position. The stop loss can be taken slightly below the marubuzu in a bullish marubuzu and slightly above marubuzu in bearish marubuzu. The sentiment will normally last 2-3 days.
Here is a perfect example of a bullish Marubuzu candle. Notice how stock followed the upward movement for the next 2-3 trading sessions:
Here is another example of a bearish Marubuzu candle. Notice how the stock continued the downward movement in the next many sessions.
The Spinning Top: The spinning top candles have a small real body however they must have equal upper and lower shadows. A spinning top candle can be both a bearish and bullish candle. The spinning top candles have a small real body because the open price and closed price are not very far away. Also, both the upper and lower shadow of the spinning top with almost equal length conveys the message that neither of buyers or sellers was able to move the price beyond a certain level. Hence there is indecision in the market. A spinning top in itself doesn’t give you any indication about market movement, however, if a spinning top appears, you know that there is indecision and one should wait for market reaction before taking any position. Here is an example of a spinning top.
Given below is another example from NSE(India) where we see a green spinning top candle reflecting indecision. After waiting for a couple of trading sessions, a clear downfall can be seen. Also, this can be related to the fact that stock was moving sideways from many trading sessions.
Doji : Similar to spinning tops, the Doji also represents indecision in the market. The difference between spinning tops and the Doji is that Doji candles have a very very small real body. These types of candles are formed because the opening and closing price is either at the same level or very near with negligible noticeable difference. The charts are a way to find human emotions about what past actions can lead to which future action. Hence you have to think the way most of the people out there are thinking about a stock. Since Doji candles are being watched by many traders and hence this becomes an important candle to watch for while taking a position. Here is an example of Doji candle. The color of the Doji candle doesn’t matter. One must wait for couple of trading sessions to observe the reaction of the market before taking a position.
The Hammer: Hammer is a candlestick with a short body and a long low tail. The longer the tail, the more strong signal it provides. It doesn’t matter if the color of the hammer is green or red. However, the hammer candle must appear in a downtrend. One should think about taking a long position on the appearance of a hammer in a downtrend. The reason for the formation can be understood as follow: The asset is in a downtrend. The lower tail of the hammer is formed because bears tried to push the low as much as possible but could not sustain to keep the price at a lower level. Hence, the price reverts from the low and closes somewhere around the opening price. Hence creating a short body and a long tail. Here is an example of Bharti Airtel (NSE). See the downtrend indicated by a blue line and how the hammer has formed at the bottom of the trend. A green candle after hammer confirms that the market sentiments have changed. One can take a long position in such formation.