Now when you read about Movement & Chart Style used in Stock Trading we will now learn about the Candlesticks in this article which are required for Technical Analysis.
Studies of a Stock with Technical Analysis includes the following topics:
- Types of Candlesticks
- Candlestick Patterns
What are all the types of Candlesticks available ?
There are various type of Candlesticks are available for high level studies however below mentioned Candlesticks are of basic type which will help you to generate a point of view on Stock Market Movement. And as a retail trader like me, you don’t need to understand those high level Candlesticks. If you inherit these types properly, I can bet you!! You will surely be profitable in the Trading.
- Spinning Top
- Hanging Man
- Shooting Star
History of any Stock in the Market Tends to repeat itself.
Always be flexible with the patternsThese assumption needs to be taken care while trading.
Now when you are aware with the Candlestick characteristics, let’s start with the Patten which will tell you the signs of positivity or negativity in the stock.
As you have seen the Candlesticks in the previous chapter, One Candlestick has 4 Price information. Opening Price, Closing Price, High Price & Low Price. But in the case of Marubozu, there is no High or Low Price. Marubozu has only Opening and Closing Price which means either only sellers are there in the market for the stock or vise-versa only buyers are there in the market.
As you can see in the above picture, there is no Upper Wick also, there is no Lower Wick. So we can assume, if a Bullish Marubozu is formed in a Stock, there is no seller in the market which means there is nothing negative about that stock and everyone wants to purchase. In other words, High Price is close to Closing Price and Low Price is close to Opening Price. Below is a chart of a stock to understand.
On the contrary, a Bearish Marubozu candlestick has been formed, there is no buyer for the Stock and everyone in the market wants to sell his holding at any cost. Opposite to Bullish Marubozu, Low Price is close to Closing Price and High Price is close to Opening Price.
So if you see a relatively smaller wicks at any side of the Candlestick, just be flexible with it. Now if you see any Marubozu on the Stock, you can now understand what does it means and what should be your point of view.
Doji is a very important candlestick and provide very crucial information about the Stock Trend. A Doji is a candlestick where Real Body ideally do not exist or in other words, Opening Price & Closing Price are same with a long Upper and Lower Wicks. If we understand this from a trader’s point of view, Bears tried to push the market in lower side however they were not successful completely. On the the contrary side, Bulls also tried to pull the market upwards however, they were also not successful in their attempt. Hence Stock made a High and Low without a real body.
As you can see in the picture above, Doji generally don’t have Real Body (If a minimal body is present, remember the special point ‘Always be flexible with Patterns‘). This shows a confusion in the sentiment of traders who don’t know, where the stock should go. And this generally happens when there is no news about the stock in the market (Neither good, nor bad).
Doji standalone do not tell much about the Stock Movement however, this tells a very important information about the movement if this is aligned with previous trend or historical data of the Stock. Also, it doesn’t matter whether it’s a Green or Red, Presence of a Doji means reversal in the trend.
Doji in represents a change in the current trend. If the market is moving up but a Doji is present at the top, it is likely that the market can be reversed and go Bearish. Vice-Versa, if Doji is present at the bottom of a Bearish Trend, it can be assumed that Stock Movement can be reversed towards up.
Spinning Top is another form of Chart Type which is equivalent to Doji but with a relatively large body. Unlike Doji, Spinning Top has a visible difference in Opening & Closing Price. Spinning Top has an equal or somewhat equal Upper & Lower wicks. Which mean Buyer and Sellers were failed to move the market in their desired direction. This Candlestick type has also represents the Indecision in the Stock Market.
Below is the sample of Bearish & Bullish Spinning Top Candlesticks. As you can see, the Smaller body than Marubozu but a relatively bigger then Doji with Equal or almost equal upper & lower wicks.
Have a closer look at the below charts which will help you to understand the impact of the Spinning Top Candlesticks Type.
Above chart shows the reversal in an uptrend with a Bearish Spinning Top and movement became Bearish of the stock. As you can see, the price of the Stock came @ Rs. 185 from Rs. 210. So if you see similar pattern in your stock, you can easily decide your next course of action.
In the above chart, the Stock was in downtrend from above Rs. 11680 and got support at Rs. 9100 with a Bullish Spinning Top. As you can see, After Bullish Spinning Top, trend revised and stock started to move upwards and it went from Rs. 9100 to Rs. 10794. So if you see this kind of pattern in the stock you are following, you will be able to purchase it at a very discounted price.
Hanging Man & Hammer
Hanging Man is a Bearish Candlestick Pattern whereas Hammer is Bullish Candlestick Pattern with a Half Body with respect to Lower Wick and No Upper Body.
Below is the sample of Hanging Man & Hammer Candlestick Pattern.
As you can see, the Real body is almost half with respect to Lower Wick. Let’s take an example to understand this.
High of the Day = 201 Rs. High of the Day = 201 Rs.
Opening Price = 200 Rs. Closing Price = 200 Rs.
Closing Price = 196 Rs. Opening Price = 196 Rs.
Low of the Day = 188 Rs. Low of the Dat = 188 Rs.
I have added the price in descending order for both the patterns for a better understanding. I have added High price a bit higher then Closing or Opening Price just to make you comfortable with the flexibility of the Chart Pattern. It doesn’t matter if body is Red or Green for the Hanging Man or Hammer formation. However, it matters their presence in the current trend. If this pattern is presence in Downtrend, it’s called Hammer and if this is present in an Uptrend, this is called Hanging Man.
So from a trader’s point of view, If we assume that the market was in full Bullish Movement and the day Hanging Man Pattern formed, one should understand that Bears entered in the Market and now they are trying hard to change the trend and Bulls started losing their strength.
Vice-Versa, If we assume that the market was in full Bearish Movement and the day Hammer Pattern formed, we can understand that Bears were trying to push the market as low as possible however Bulls entered in the market and resulted into a long lower shadow with a smaller real body. So this denotes a reversal in the trend and one can see the opportunity to enter in the market.
Shooting Star is last type of Candlestick that we will gonna learn. This is very powerful type in Candlestick because the trend reversal after a shooting star is very likely to happen. This is a Bearish Signal Candlestick which tells us that the Bears have made their entry in the market.
Have a look at the picture below and you will automatically understand why this is Bearish.
As you can see that picture above, This candlestick is opposite to Hammer or Hanging Man because it has long Upper body. So from a trader’s point of view, we can understand that if Shooting star is formed after a long bullish trend, Bulls are trying to push the market to another higher level however Bears entry didn’t allow them. Hence a long upper wick formed and real body left quite smaller.
Below is a chart where you can see the trend reversal after Shooting Star Candlestick Formation. Stock which was in Bullish trend before this candlestick was at around Rs. 1800 and after trend reversal it came down to Rs. 1500. So you can decide your next course of action whenever you see the Shooting Star in your Stock.
So this is all about basic Candlestick Types which will help you to guide the next likely move on the stocks. If you still want to learn about other types of candlesticks you can visit Wikipedia Page for this. Multiple Candlesticks together forms a Chart Pattern which is way more than powerful in comparison to the Single Candlestick.
I would love to hear back from you if you have any questions and doubt on these types or if you know about other candlestick type. Please share your valuable comment and let me know if something new which can also help us to earn in Stock Market Trading.