Candlestick charting techniques

Candlestick charting techniques (candlestick chart) or candlestick pattern is a method in technical analysis that is used quite commonly.

Candlestick charting techniques are built from independent candlesticks that represent trading information for each session.

1. The structure of a candle.

On a candlestick chart, there will be many candles, each candle is composed of basic components. The image below is a typical shape of a bullish candle (green) and a bearish candle (red):

Candlestick charting techniques

 

The candle body is the largest component (the distance between the open price and close price) that is colored to represent the up and down of the price. When the open price is lower than the close price, the body of the candle is usually colored green (indicating an up price), when the open price is higher than the close price, the body is usually colored red (indicating a down price).

The candle head is the price range between the high price and the candle body.

The candlestick is the price range between the low price and the candle body.

Some special candle cases:

Candlestick charting techniques

2. Some key points of candlestick charting techniques in stock trading.

Some key points of candlestick charting techniques:

The longer the candle body, the stronger the buying/selling power. The long body shows a large difference between the open price and the close price. This shows that the buyers are overwhelming the sellers (green candle) or the sellers are exerting strong pressure (red candle).

The short body of the candle shows that the market is slowing down, both sides are hesitant and undecided.

Long candle heads and long candlesticks show that the market is having competition between the two sides. Both sides bought and sold strongly, causing the price to up and down continuously. It is necessary to pay attention to the high price and low price in order to evaluate support and resistance levels.

3. Some special candlestick patterns.
Hammer pattern:

Conditions of formation:

  • The previous trend was a downtrend.
  • The open price, close price, and high price are equal or the same.
  • The candlestick is twice as long as the candle’s body.

Hammer pattern

When the close price is equal to the high price and higher than the open price, the Hammer pattern is considered bullish because the market can push the price higher than the open price. Selling pressure from bearish sentiment could not be maintained, and buying pressure increased strongly.

When the open price is equal to the high and higher than the close price, the Hammer pattern is considered less bullish, unable to return to the open price.

The longer candlesticks suggest that the market has tested for a support level and when it finds it, the price starts to push up, near the open price. As a result, the downtrend has been rejected and could serve as a warning of a new uptrend reversal.

Tombstone pattern:

Conditions of formation:

  • The previous trend was a downtrend.
  • The open price, close price, and low price are equal or the same.
  • The candle’s head is twice as long as the candle’s body.

Tombstone pattern

When the open price is equal to the low price and lower than the close price, the Tombstone pattern is considered to be strongly bullish.

When the close price is equal to the low price and lower than the open price, the Tombstone pattern is considered less bullish.

Longer candle heads suggest that the market is bullish because the price is hesitant to move lower by significantly up prices in a day. As a result, the downtrend has been rejected and could serve as a warning of a new uptrend reversal.

Bullish engulfing pattern:

Conditions of formation:

  • The previous trend was a downtrend.
  • Consists of two candles: a smaller bearish candle (first day) and a larger bullish candle (second day).
  • The body of a bearish candle (first day) is usually smaller and can be contained within the body of a bullish candle (second day).

Bullish engulfing pattern

The Bullish engulfing pattern shows a strong bullish expectation, buyers overwhelm the sellers. The price of the second day is pushed up to higher than the open price of the first day.

Bullish piercing line pattern:

Conditions of formation:

  • The previous trend is a downtrend.
  • Consists of two candles: a bearish candle (first day) and a bullish candle (second day).
  • The close price of the second day must be higher than the average price of the first day.

Candlestick charting techniques - Bullish piercing line pattern

The Bullish piercing line pattern is similar to the Bullish engulfing pattern.

There is usually a significant gap between the close price of a bearish candle (first day) and the open price of a bullish candle (second day). It shows strong buying power as the price is pushed up higher than the previous day’s average price.

Morning star pattern:

Conditions of formation:

  • The previous trend was a downtrend.
  • Consists of three candles: a large bearish candle (first day), a small bullish or bearish candle (second day), and a large bullish candle (third day).
  • The second day makes a new low price, with a close price to the same open price and a close price on the first day.

Morning star pattern

On the first day, of a downtrend, sellers overwhelm buyers often making new lows.

The second day started with a bearish interval, however, the price didn’t drop much. Prices sometimes up or down slightly and correct to close price to the same open price. It shows the indecision of the market, which can be considered as not breaking the support level. The second-day candle is quite small and can be bullish, bearish, or neutral.

The third day started with a strong bullish sentiment with buying and overwhelming selling. The price is pushed up and closes at a high price. The downtrend has been rejected and could serve as a warning of a new uptrend reversal.

Three white soldiers pattern:

Conditions of formation:

  • The previous trend is a downtrend.
  • Consists of three consecutive bullish long candles.
  • The three candles all have long bodies, short candles head, and short candlesticks or none.
  • The open price and close price of the following candle are gradually higher than the previous candle.
Three white soldiers pattern

It is a very strong bullish signal that occurs after a downtrend. It shows a steady increase in buying pressure and decreasing selling pressure.

Bullish three-step pattern:

Conditions of formation:

  • The previous trend is an uptrend.
  • Consists of five candles: Two long bullish candles and three consecutive short bearish candles.
  • Three short bearish candles are sandwiched between two long bullish candles.
  • The low price of the three bearish candles is higher than the open price of the previous bullish candle.
  • The high price of the three bearish candles is lower than the close price of the following bullish candle.

Candlestick charting techniques - Bullish three-step pattern

The Bullish three-step pattern shows that despite some selling pressure following the previous uptrend, buyers retain control of the market. The uptrend continued to strengthen after the buying force overwhelmed the selling on the next bullish candle.

Hanging man pattern:

Conditions of formation:

  • The previous trend is an uptrend.
  • The open price, close price, and high price are equal or the same.
  • The candlestick is twice as long as the candle’s body.

Hanging man pattern

After a long uptrend, the Hangman pattern shows price indecision by dropping significantly on the day.

When the open price is equal to the high price and higher than the close price, the Hangman pattern is considered to be a strong drop because the market can drop below the open price. Buying pressure from bullish sentiment could not be maintained, and selling pressure increased strongly.

When the close price is equal to the high price and higher than the open price, the Hammer is considered less bearish, since there is still buying power relative to the open price.

The Hanging man pattern formation is seen as a warning sign of a reversal to a new downtrend.

The Hanging man pattern is the opposite of the Hammer pattern.

Shooting star pattern:

Conditions of formation:

  • The previous trend is an uptrend.
  • The open price, close price, and low price are equal or the same.
  • The candle’s head is twice as long as the candle’s body.

Shooting star pattern

When the close price is equal to the low price and lower than the open price, the Shooting star pattern is considered to be strongly bearish.

When the open price is equal to the low price and lower than the close price, the Shooting star pattern is considered to be a milder bearish.

Longer candle heads suggest that the market is bearish because the selling pressure gradually overwhelms the buyers. The price hesitated to move and significantly down prices in a day. As a result, the uptrend has been rejected and could serve as a warning of a reversal to a new downtrend.

The Shooting star pattern is the opposite of the Tombstone pattern.

Bearish engulfing pattern:

Conditions of formation:

  • The previous trend is an uptrend.
  • Consists of two candles: a smaller bullish candle (first day) and a larger bearish candle (second day).
  • The body of a bullish candle (first day) is usually smaller and can be contained within the body of a bearish candle (second day).

Bearish engulfing pattern

The Bearish engulfing pattern represents a strong bearish market sentiment, with sellers overwhelming the buyers. The price on the second day didn’t push up before being pushed down, below the close price of the first day. It was taken as a sign of a new downtrend.

The Bearish engulfing pattern is the opposite of the Bullish engulfing pattern.

Dark cloud cover pattern:

Conditions of formation:

  • The previous trend is an uptrend.
  • Consists of two candles: a bullish candle (first day) and a bearish candle (second day).
  • The close price on the first day must be higher than the average price on the second day.

Candlestick charting techniques - Dark cloud cover pattern

The Dark cloud cover pattern is similar to the Bearish engulfing pattern and opposite to the Bullish piercing line pattern.

There is usually a significant gap between the close price of a bearish candle (first day) and the open price of a bullish candle (second day). It shows strong selling because the average price of the second day was pushed down the close price of the first day. This adds to the bearish sentiment.

Evening star pattern:

Conditions of formation:

  • The previous trend is an uptrend.
  • Consists of three candles: a large bullish candle (first day), a small bullish or bearish candle (second day), and a large bearish candle (third day).
  • On the second day makes a new high price, a close price to the same open price, and a close price of the first day.

Evening star pattern

On the first day, an uptrend, buyers overpower sellers and often make new high prices.

The second day started with a bullish range, however, the price didn’t go up much. Prices sometimes up or down slightly and correct to close price to the same open price. It shows the indecision of the market, which can be considered as not breaking the resistance level. The second-day candle is quite small and can be bullish, bearish, or neutral.

The third day started with a strong bearish sentiment with selling overwhelming buying. The price is pushed down and closes at a low price. The uptrend has been rejected and could serve as a warning of a new bearish trend reversal.

The Evening star pattern is the opposite of the Morning star pattern.

Three black crows pattern:

Conditions of formation:

  • The previous trend is an uptrend.
  • Consists of three consecutive bearish long candles.
  • The three candles all have a long body, short candles head, and short candlesticks or none.
  • The open price and close price of the following candle are gradually lower than the previous candle.

Three black crows pattern

The Three black crows pattern is the opposite of the Three white soldiers pattern.

It is a very strong bearish signal that occurs after an uptrend. It shows a steady increase in selling pressure and decreasing buying pressure.

Bearish three-step pattern:

Conditions of formation:

  • The previous trend is a downtrend.
  • Consists of five candles: Two long bearish candles and three consecutive short bullish candles.
  • Three short bullish candles are sandwiched between two long bearish candles.
  • The high price of the three bullish candles is lower than the open price of the previous bearish candle.
  • The low price of the three bullish candles is higher than the close price of the following bearish candle.

Candlestick charting techniques - Bearish three-step pattern

The Bearish three-step pattern is the opposite of the Bullish three-step pattern.

The Bearish three-step pattern shows that despite some buying pressure following the previous long downtrend, sellers retain control of the market. The downtrend continued to consolidate after selling overpowered the selling on the next bearish candle.

Above is some content about candlestick charting techniques: The structure of a candle, some key points of candlestick charting techniques, and some special candlestick patterns. In order to use candlestick chart patterns effectively, it is necessary to accurately identify the trend and resistance level, and support levels.

Wish you to use candlestick charting techniques effectively!

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