Types Of Candlesticks In Stock Market Charts

Japanese Candlesticks are a technical analysis tool that traders use to analyze the price movement of securities(stocks). The concept of candlestick charting was developed by Munehisa Homma, a Japanese rice trader. During routine trading, Homma discovered that the rice market was influenced by the emotions of traders, while still acknowledging the effect of demand and supply on the price of rice. A Candlestick Chart shows more information than line charts.

For more information on how candlesticks are formed and how to read charts: Click here

Types of Candlesticks

These candle patterns are used to predict the movement of the market. However, It is advised to practice and find these patterns on paper trading before actually starting to trade. This article is for education purposes only.

Marubozu

Marubozu candles are long, either red or green. These candlesticks have a long body with very little or no wick. If the candle is green that means the buyers had the control of the market from open to close. These can provide an insight into the future trend of price. However, a confirmatory candle with increasing volume should be considered for reassurance.  

Doji

Doji Candlesticks are formed when the opening price and closing price are virtually equal. This Candlestick looks like a plus sign(+). This candle is used to predict the potential trend reversal. However, the Doji is not significant if the market is not in a clear trend. If a Doji appears after an uptrend rally then a downfall can be expected. A further bearish(red) candle with significant volume should be taken into consideration for reassurance. The length of the upper and lower wick can vary resulting in different types of Doji. There are generally 4 types of  Doji. 

1. Neutral Doji
2. Long Legged Doji 
3. Dragonfly Doji
4. Gravestone Doji

Types of Doji 

Hammer & Hanging Man

The Hammer and Hanging Man look similar but they have very different implications depending on the previous trend. Both of these Candlesticks have a small body and long lower wick with no or very small upper wick.

Hammer

Hammer Candlestick is formed after a decline and indicates a reversal. The long lower wick of the Hammer shows that the sellers drove the price lower but the buyers were able to bring the price up and give a positive closing. The hammer alone is not an indication of trend reversal, you should wait for an increase in volume and another green candle before starting the trade. These ensure the increase in price and gives reassurance. 

Hanging Man

Hanging Man Candlestick is formed after an uptrend and indicates a reversal. It signals that the selling pressure is increasing in the market. The low of the long lower wick confirms that sellers pushed prices lower during the session but the buyers were able to bring the price up before closing. The large wick signals that the buyers are losing control and sellers are taking the lead.  

Inverted Hammer & Shooting Star

Inverted Hammer and Shooting Star look similar but they have very different implications depending on the previous trend. Both of these Candlesticks have a small body and long upper wick with no or very small lower wick.

Inverted Hammer

The Inverted Hammer forms after a downtrend or decline. It represents a potential trend reversal. A buying pressure in the market is shown by the long upper wick. However, the buyers could not sustain the pressure and sellers brought the price down but the candle is still green. So we need to have confirmation before getting into the trade. An Increase in volume or a further green candle can be taken as reassurance.

Shooting Star

The Shooting Star forms after an uptrend or incline. It represents a potential trend reversal. A selling pressure in the market is shown by the long upper wick. This is generally formed when the prices open at gap up at the opening of the market, climb higher and then retrace. To be a substantial trend reversal the body of the candle should be half of the length of the upper wick. A red candle with a large volume is required for reassurance.

Bullish & Bearish Engulfing

The Engulfing pattern is formed of two candles. If the trend is in a downward direction and a bullish(green) candle is formed such that the previous bearish(red) candle can be completely engulfed by the green candle then we can say it is a Bullish Engulfing pattern and it signals that bulls have taken over the market and a possible uptrend can be expected.

Bullish Engulfing

Similarly in a rising market(Uptrend), if a bearish(red) candle is formed such that previous bullish(green) can be completely engulfed by the red candle then we can say it is a Bearish Engulfing pattern and it signals that bears have taken over the market and a possible downtrend can be expected.

Bearish Engulfing

Three White Soldiers & Three Black Crows 

These Candlesticks form over a period of three days and these patterns show a highly bullish or bearish steady trend.

Three White Soldiers

Three White Soldiers consist of three long Bullish(green) consistent candles with little or no wicks (Marubozu) which open and close progressively higher than the previous day. This pattern shows a consistent buying pressure and a strong uptrend can be expected.

Three Black Crows

Similarly, Three Black Crows consist of three long Bearish(red) consistent candles with little or no wicks (Marubozu) which open and close progressively lower than the previous day. This pattern shows a consistent selling pressure and a strong downtrend can be expected.

Summary:

Bullish Patterns:

1. Hammer
2. Inverted Hammer
3. Bullish Engulfing
4. Three White Soldiers

Bearish Patters:

1. Hanging Man
2. Shooting Star
3. Bearish Engulfing 
4. Three Black Soldiers