So now when you are aware with Basic Stock Trading Terms , Movements of Stocks and how charts are look like, & what are the Types of Candlesticks. In this article, we will understand the Candlesticks Patterns formed by multiple Types of Candlesticks together.
What should I assume with Candlestick Patterns ?
Pattern formed by multiple Candlesticks tells us the general Trading View of the Traders in the Stock Market. These are predefined set of candlesticks which are widely used by traders in their trading sessions. In our previous blog, we understand what to assume with One Candlestick. But Trading Opportunity evolves or define with minimum 2 candlesticks. You might have seen few of my calls on Stock Trading Tips where I generally refer, Bullish Engulfing, Bullish Harami, Morning Star, these all are the multiple candlesticks pattern which we will learn in few minutes.
Can I learn these Candlestick Patterns ?
Sounds a bit Technical but Dear Readers, Trust me!! It is not that difficult to learn like it sounds. Also, this is not meant only for giant traders on the TV. You can always learn these tricks and start trading yourself. And, Of course, we too will learn them pretty soon!! Though, It is not that simple as well, that you just read my single blog and start trading. You have to learn each of these Stock Trading Techniques and then you should practice all these Techniques in a simulator for at-least 1-2 Months where you neither lose any money nor you gain money, but you will gain experience on Stock Trading and get a hands on with your skill.
It is similar to learn how to drive a Bicycle. You always start with Tricycle in you home, where there are no chances of any harm. Then you try a bigger one in an empty ground where you have lesser chance to fell but no chance of accident. Then you learn to drive it in street out of your house where traffic is always less, where chances to fell from it or met with an accident are less but they exist. Finally, you are trained to drive it on the actual road with heavy Traffic where you are driving or competing with all kind of drivers. Might be few of them are driving on the road from several years with expertise.
So similarly, always try in your home or empty ground in Stock Market with virtual trading applications. There are numerous applications available which allows you to trade with virtual money. However, make sure, you use amount which you ACTUALLY can spend or which you can lose in the stock market if anything goes wrong. Try to learn all these skills and trade in virtual market for at least 2-3 months. When you see yourself gaining in the market for 90% of the times, then you can think to trade in the real market with real money against expert traders.
What are all the types of Candlestick Patterns?
There are many Candlestick Patterns available in the market. You also can find yourself which you think, brings profit to you and back tested by you several times. However there are major 5 types of patterns as mentioned below used globally by the traders to identify opportunities in Stock Market. We will learn them briefly.
- Engulfing Pattern
- Harami Pattern
- Piercing Pattern
- Dark Cloud Cover
- Morning Star
- Evening Star
1. Engulfing Pattern
This pattern is composed of two sub patterns, Bullish & Bearish. Engulfing means cover it completely. So, lets understand these two types of Pattern under Engulfing.
- Bullish Engulfing
- Bearish Engulfing
1.1 Bullish Engulfing
Bullish Engulfing Means a Green candle covers the Red Candle from the previous trading sessions completely. The thought process behind this pattern is, when market is in downtrend and Bears are in full momentum in the market. Stock is making lower lows and lower highs from last few trading sessions. And suddenly with the change in sentiment of the traders due to any positivity about the stock, it has formed a long Green Candlestick and covered the Red Candlestick completely.
As you can see in the image below, price of the stock was decreasing from Rs 10800 from last 8 sessions before making Bullish Engulfing Pattern. Where you can see yourself, a Green Candlestick covered the last Red Candlestick completely. After that, Stocks price raised from Rs 10250 to Rs 11134.
1.2 Bearish Engulfing
So now, you can understand by yourself, how does a Bearish Engulfing will look like and the Stock Trading View behind this pattern.
Yes! you are getting it correctly. A Red Candlestick at the top Bullish Trend covered a Green Candlestick of previous stock trading session completely after. In other words, Bulls were in full swing to raise the price of the stock as high as possible however, Bears made their entry into the market and formed a big Red Candlestick. After this Bulls get panic and losses their momentum. Hence the price of the stock is supposed to decrease for new few sessions.
As you can see below image, price of the Stock was raising day by day from many sessions previously and formed a Bearish Engulfing Pattern at Rs 142.55 and after that, prices came down at Rs 126.76 which is 11% from it’s recent high. So that a big margin that nobody wants to lose in Stock Market.
Also, Stock formed a Doji Pattern at the bottom which is again a reversal pattern at Rs 126.76 and after that, a Long Bullish Pattern has been formed. Which clearly means that the trend of the Stock will reverse. And a Sensible Trader will grab this opportunity and ride on this to Earn marginally well.
2. Harami Pattern
Don’t feel offended!! It’s Pattern name which is originated from Japanese, which means ‘Pregnant’. So, in reference to Stock Market, a pattern inside another pattern. It also includes 2 sub patterns like Engulfing Pattern. This is also similar to Engulfing Pattern in every manner except 1 thing. In Engulfing Pattern, Green or Red candlestick cover previous day candlestick completely however, in Harami Pattern the candlestick will only cover a very small portion inside the previous day candlestick. Confused? We will understand it briefly. Let’s Start!
- Bullish Harami Pattern
- Bearish Harami Pattern
2.1 Bullish Harami Pattern
As you can see in the image above, prices of the stock were getting lower day by day from 8 sessions. And after that Bulls made their entry in the market and formed a Bullish Harami Pattern. As a result, Stock prices raised from Rs 183 to Rs 203 continuously and after few up and downs, it remains in Bullish Trend till Rs 210. Which is approx. 15% gain 22 Days or a Month’s time. Which is a very great deal because, you can never get 15% return on your investment in a month anywhere else.
2.2 Bearish Harami Pattern
Watch below image closely, and you will conclude by yourself. It is just reverse to Bullish Harami Pattern as we all know.
Bulls were in full swing and one day, Bears made their entry in the market and formed Bearish Harami Pattern. The price of the stock came down all the way from Rs 980 to Rs 864. So now you know what action you are supposed to do when stocks in your portfolio forms similar patterns in order to stay away from losses.
Though, it is not always good to sell your stock for a smaller retracement. Because, stock do not raise higher & higher level every day. Stocks always retrace their price after few positive trading sessions and move like a zig-zag. And this can be understood by Fibonacci Retracement levels. We will understand it in coming blogs where you can learn Fibonacci Series and their relevance in the Stock Trading.
3. Piercing Pattern
As names suggests, Piercing Pattern, you can think about a ring in the ear. Relevance to stock market, a Green candlestick after a long Bearish Trend. This pattern is also similar to Engulfing pattern with a slight difference. In this pattern, the Green candlestick covers the Red candlestick partially. It covers 50% to 100% part of the Red Candlestick with market opens on Gap Down Opening. Have a look at the image below to get a clear understanding of this pattern.
So, it should be clear as per the image above, Bears are in full control in the market and stock is opening with Gap Down Opening. Gap Down Opening means stock opens at the lower price than the previous day’s closing price. Stock is making lower lows and lower highs. In the same manner, Market opens at lower level however, formed a Green candlestick at the bottom or and covering the Red Candlestick from 50% to 100% is considered a Piercing Pattern. Which means Bulls have entered the Stock and Bears gets panic.
4. Dark Cloud Cover
Dark Cloud Cover is opposite of Piercing Pattern. It is a Bearish Pattern and considered when formed at the top of the Bullish Trend. As similar to Piercing Pattern, it covers 50% to 100% of previous day’s Green Candlestick.
As you can see in the above image, Dark Cloud Cover Pattern has been formed at Rs 1435 after many Bullish Candlesticks and now the price tends to decrease. And as it is clear from the image, after forming Bearish Pattern, price came down at Rs 1200. Which is 16% loss from its recent top.
5. Morning Star
Morning Star is a powerful bullish pattern which forms in 3 days. After this pattern, stock price is supposed to go a long way in comparison to any other pattern.
As you can see the trend in above image, Morning Star Pattern formed at the bottom of the downtrend. Recognition of this pattern is very easy. If you see a Stock in Downtrend with bears in full control forms a Red Candlestick on 1st day. A Doji forms with a gap down opening on 2nd day confirming the Bears control. And on 3rd Day, a Green Candlestick forms with gap up opening covering Red Candlestick of the 1st Day. So, on this Green Candlestick Day, you can see a Morning Star as shown in image above.
6. Evening Star
On the contrary to Morning Star Pattern, Evening Star is a similarly powerful Bearish Pattern. This pattern also evolves in 3 days and provides strong sell signal when formed at the top of a Bullish Trend.
As you can see in the above image, on 1st Day a Green candlestick forms representing the Bulls in full swing. On the 2nd Day, a gap up opening confirms the Bulls momentum on the stock however, it does not make much impact and formed a Doji. This Doji (A Reversal Candlestick) puts pressure on Bulls and panic them. On 3rd Day, Bears take control on the market with gap down opening and forms a Red Candlestick covering 1st Day’s Green Candle completely. Thus, an Evening Star pattern forms and sends out a strong sell signal.
Summarizing Candlestick Patterns
After understanding above Patterns, you can easily understand that any Bullish Pattern considered strong when formed at the bottom of a down trend. Similarly any Bearish Pattern formed at the top of an uptrend considered powerful sell signal. Now you must be wondering how to recognize top and bottom of any trend. So, I will discuss this will all you shortly and add a link here as well.
So now you know how to detect a Bullish or Bearish Candlesticks and Patterns. You can understand the general point of view in the market and Trade accordingly in Stock Market.
Please share your comments or suggestion if you need any clarifications on these or you have any other input on this. I would love to hear back from you anytime.