It is critical to learn to read and understand candlesticks or candles if you want to be a successful stock market trader. Candlesticks are a type of technical chart that is used to depict price changes in a stock, derivative, or currency. Understanding candlesticks and their patterns can assist you in determining when to enter and exit transactions. In this post, we’ll go over what candlesticks are and then look at some of the most common single candlestick patterns that every trader should be aware of. Let’s get this party started.
What are Candlesticks or Candles?
Candlesticks are the most prevalent method for determining market trends, historical research, and future predictions. Technical indications of this type are the most powerful. Candlesticks with their designs cast light on the present and go a long way toward understanding future trends, just like a burning candle does for the present and future.
A simple candlestick depicts the events that occurred during the specified timeframe. It displays the day’s open, high, low, and closing (within the timeframe selected). The length of the candle can assist us understand the day’s volatility. The day is more volatile the longer the candle is, and the day is less volatile the shorter the candle is. Because the candlesticks are formed on previous market movement, they might be considered a historical indication. However, the candlesticks that have been constructed might help you understand future trends and price patterns.
Before we go into the numerous candlestick patterns, it’s important to keep the following points in mind:
“Trend is your buddy,” says the first. Contrary to popular belief, you should not deviate from the norm.
2. One should be willing to change his mind. In most cases, stubbornness leads to calamity.
3. Analyzing historical data can help you predict future price patterns.
4. When trading with small candles, avoid taking directional trades. In general, trends emerge after candles of a significant length.
Single Candlestick Patterns
To put it another way, a single candlestick pattern is made up of only one candle. We don’t look at several or groups of candles in this case, and the trading signal is based on a single day’s trading activity. The following are some of the most common Single candlestick patterns that we will explore in this article: The Marubuzo, the Doji, the Hammer, the Hanging Man, and the Shooting Star are all examples of spinning tops.
1. The Spinning Top
Unlike any other candlestick formation, the Spinning Top does not indicate a distinct trend direction but does have a lot of price action associated with it. The following are my first impressions while looking at the candle:
In comparison to the upper and lower wicks, the candle’s body is quite little.
Both sides have wicks that are around the same size.
Although the spinning appears to be a simple candle, it contains a lot of price activity. The little main body suggests that the candle’s open and shut are quite close together. Because the open and close are so close together, the candle’s color does not usually indicate a trend.
The day’s high is visible in the upper body. This just means that the bulls attempted to go up but were unsuccessful. The lower body shares many of the same traits as the upper body. This just means that the bears attempted to drive the market lower but were unsuccessful.
2. The Marubuzo
The Marubuzo is a single candlestick design once again. It’s probably the only candlestick pattern where the previous trend isn’t taken into consideration. Only the last candle is highlighted.
3. Marubuzo bullish
The open of the candle in Bullish Marubuzo is low for the day, and the closure of the candle is high for the day. In this candlestick pattern, there are no wicks. This candlestick can also be described as a trend reversal candlestick. Traders are willing to buy the stock at the high of the day since the purchasing intensity is so great. This candlestick pattern simply indicates that buying will continue in the next days. The closing price of the Marubuzo candle is the recommended buying price. The open should be low and the close should be high, according to theory. However, in practice, some variation is permitted.
Let’s look at an example to see what we’re talking about: The price of the XYZ company’s stock has created a Marubuzo candle with the following values: Open = 403, High = 450, Low = 400, Close = 449.
The risk profile of the trader now determines when the trade is executed. On the day the Marubuzo is formed, a risk-taker would enter the transaction. So, how does this high-risk trader acquire confirmation of Marubuzo’s formation? The trader accomplishes this by placing the deal near the conclusion of the day.
A risk-averse trader, on the other hand, would enter the trade the next day once the trend has been confirmed. So, while a risk-averse trader’s entrance price may be higher than a risk-taking trader’s, the risk-averse trader has more confidence in the pattern development.
One thing to remember is that the transaction must be done with a stop loss. Because of the inherent hazards of trading, a stop loss aids the trader in minimizing losses.
4. Marubuzo bearish
The open of the candle in a Bearish Marubuzo is high for the day, while the low of the candle is close for the day. A bearish Marubuzo means that the selling pressure is so strong that the trader is willing to sell the stock at the day’s lows in anticipation of further price declines. This candle represents a change in momentum, which is expected to endure for some time.
It’s important to remember that these transactions aren’t supposed to be scalped; instead, they’re meant to be held until the ideal price is reached. The greatest method is to use trailing stop losses.
5. The Doji
The Doji is a candlestick formation without a real body. There are only wicks on both sides. As a result, the candle’s starting and closing prices are identical. The Doji pattern is commonly compared to a spinning top, with the exception that Doji has no true body. Dojis are mainly either momentum changers or halters. These wicks plainly demonstrate the traders’ indecisiveness about the market’s momentum and direction. Let’s have a look at it using the following scenario.
Assume the market is in a bullish trend and has been trading with green candles for several days. If a Doji candle is created, it could merely indicate the market’s waning momentum or it could indicate the end of present momentum and herald a trend reversal. As a result, in this scenario, it is prudent to exercise caution and exit the long position, or at the very least, to have stop losses in place. Before joining fresh trades, this is usually a good time to wait and watch.
6. The Hammer
Because of its creation pattern, the Hammer pattern is one of the most convincing trading patterns. The hammer pattern happens when a candle opens at a high price but is unable to maintain it, and it falls significantly. However, with continued purchasing activity, the candle is able to recover, and it ends in green, near the starting price. The wick must be at least twice the size of the body in this case.
7. The Hanging Man
“A hanging man upswing signals that prices may start sliding,” according to Investopedia. A little true body, a lengthy lower shadow, and little or no higher shadow make up the candle. The hanging man indicates that selling pressure is beginning to build.”
One of the most significant requirements for a candle to be labeled as a hanging man is that the market be in a positive trend. A Hanging man, like Hammer, can be any color as long as it fulfills the body to wick requirements. The high of the candle serves as the Stop Loss for short trades made using the hanging man pattern.
8. The Shooting Star
Save the best for last, as the adage goes. The one candlestick pattern with the biggest influence. The shooting star resembles a hammer inverted or a hanging guy. It sends very powerful trend reversal signs.
The upper wick of the shooting star candle is quite long. The wick is typically double the diameter of the candle body. The pattern is stronger the longer the wick is. Because the shooting star is a bearish reversal pattern, the trend before it was positive. The shooting star usually appears on a day when the current bullish trend is predicted to continue. When a shooting star candle appears, it is a good idea to quit long trades or at the very least set a stop loss and, if possible, reverse long holdings. When trading this type of setup, one must be completely objective.