Candlestick patterns in Share Market Trading
Candlestick patterns in Share Market Trading

Candlestick patterns in the share market are the same as the road signs on streets while driving a vehicle. Patterns can give you a sense that when the price is about to increase momentum or when to make a U-turn.

To understand the Candlestick pattern in depth, we should go a little into the discovery of those patterns. Let’s start with the legend who introduced these candlesticks patterns in the price action chart.

Munehisa Homma, a rice trader [ In the late 1800s] from Japan discovered the candlestick patterns which show open, close, low and high price movement in a single frame. 

Drawing these four main components of price into a candle becomes Japanese candlesticks. With these candlesticks, Munehisa derives the most powerful reversal patterns that work well in the stock market. 

Later in 1991, Steve Nison published a book based on these candlesticks named Japanese Candlestick Charting Techniques. Steve is also known as the Father of Modern Candlestick Patterns.

Types of candlesticks from which the patterns are formed

There are eight types of candlesticks that can be formed in price charts.

Green candle with a single wick

The candle’s body is green and the wick is only on either side of the body. It shows the opening, closing and one high or low of the price in a given time. The one close will become the high of the candle and the one open will become the low of the candle as well.

Green candle with both sides wicks

With the green body, the wick is on both sides. It shows the open, close, high and low of the price separately at a given time.

Green candle without a wick

A strong bullish price with only a green body. It shows the opening and closing of the price. The low price is open and the high price is close as well.

Red candle with a single wick

The colour of the body is red with a single wick either upside or downside. The opening and Close of the candle are shown by the body. One of the lows can be close and one of the highs can be the opening of the candle.

Red candle with both sides wicks

The red body with both sides wicks shows the open, close, high and low at the different levels of price.

Red candle without a wick

A strong bearish price with the red body shows opening and high at the same level. The closing and the low are also at the same level.

Without body, a single wick

When the price opens and close are at the same level, and the wick is only on one side. One wick can represent the low or the high of the candle.

Without body, both sides wick

Open and close are still at the same level, and the upper wick is the high price. Also, the lower wick of the candle the low of the price.

These 8 types of candlesticks when become short or long in size, it makes reliable candlestick patterns depending on the trend of the market. A complete understanding of the types of candlesticks is necessary before going into learning the candlestick patterns.

What are the candlestick patterns?

Candlestick patterns are basically based on the movement of prices on graphical charts. Candlesticks together make different types of patterns which help to predict the movement of price in a direction.

After completing a particular pattern, the price mostly behaves the same as its historical data. These patterns are the footprints of price movements which helps us to forecast the action of the price at a certain level. Although Candlestick patterns show the Greed and Fear of the market participants.

It can be seen as the price seen as related to the time.

For example: In a 5-minute timeframe, if the price makes a long wick to the down, it represents a bullishness because the price has done the journey towards the upside in a very less time i.e. 5 minutes.

So, the candlestick patterns are the most reliable patterns not only in accordance with the price but as related to the time also.

13 best candlestick patterns used in the share market

There are more than 45 candlestick patterns found in the Stock market, which I have listed below in the article. The main candlestick patterns which are more reliable in share market trading are written below.

1. Morning star

The morning star consists of three candles. It can be found in a downtrend. The first candle is bearish as it represents the ongoing bear trend. The second candle is a small candle which stays near the bottom of the first candle. It shows the pause in the bear trend. The third candle is the bullish candle which consumes at least 50% of the first candle. This candlestick indicates that there can be a trend reversal. To trade this candlestick, wait for the third candle of the evening star to appear in the reverse direction for more confirmation.

Specification: The third candle which represents bullishness should engulf at least 50% of the first candle. The more it engulfs the first candle the more reliable the pattern will be.

Morning star pattern

2. Evening Star:

The evening star also consists of three candles. It is usually found in an uptrend. The first candle which is in the direction of the trend i.e. bullish closes with a green candle. The second candle is small, which shows a pause in the current trend. It is made near or a little up to the high of the first candle. After that, the third candle, the trend-changing candle comes down and shows the lack of strength in the upward moment. The last candle which is bearish consumes at least 50% of the first candle. To trade this candlestick, wait for the third candle of the morning star in the reverse direction for more confirmation.

Specification: The third candle which represents bearishness should engulf at least 50% of the first candle. The more it engulfs the first candle the more reliable the pattern will be.

Evening star candlestick pattern

3. Bullish Engulfing Candlestick Pattern:

Bullish engulfing candlestick made with two candles. The first candle is in the direction of the trend i.e. bearish. The turning table is the second which opens below the close of the first candle but engulfs the entire previous one. The second candle engulfs the entire previous bearish candle. Bullish Engulfing Candlestick indicates bulls are overweighing bears resulting in price movement towards the upside.

Specification: The second bullish candle should engulf the entire previous bearish candle.

Bullish engulfing candlestick pattern

4. Bearish Engulfing Candlestick Pattern:

A bearish engulfing candlestick is also made with two candles. Alternate to the bullish engulfing, the first candle is in the direction of the trend i.e. bullish. The turning point is shown by the second candle which opens above the close of the first candle but closes down to the previous candle. It engulfs the entire previous candle. Bearish engulfing candlestick indicates that bears are overweighing bulls resulting in price movement towards the downside.

Specification: The second bearish candle should engulf the entire previous bullish candle.

Bearish engulfing candlestick pattern

5. Doji candlestick

Doji candlestick pattern is the formation of a small body or no body in between and long wicks on the upside and downside of the candlestick. It closes exact or near where the open is formed. Doji candle shows the indecisive or non-directional price movement in the market and no outcome from the bull-bear fight in a specific time period. To play a Doji candlestick pattern, a trader or an investor should wait for the price to cross either up or down the Doji.

Avoid trading this candlestick until the next candle appears in any direction.

Specification: A Doji candle should have no body or very minimum body with the wick on both sides.

Doji candlestick pattern

6. Dragonfly Doji pattern:

In a downtrend, when the price after opening without moving a tick upward, goes down but covers all the down move within the same candle, it is known as Dragonfly Doji. It has a long wick to the downside and no body or a very small body at the top. Dragonfly Doji represents the opening and closing almost at the same price whereas the wick represents the price movement rejection to the downside which increases the probability of trend reversal towards the upside.

Specification: With almost the same open and close, the price roams downside but didn’t resist there.

Dragonfly Doji candlestick pattern

7. Gravestone Doji pattern:

In an Uptrend, when the price after opening without moving a tick downward, goes up but coves all the up move within the same candle, it is known as Gravestone Doji. It has a long wick to the upside with a tiny body without a body at the bottom of the candle. The Gravestone Doji candlestick pattern represents tight open and close price movement whereas the wick represents the price movement rejection to the upside which increases the probability of trend reversal towards the downside.

Specification: With almost the same close and open, the price travels upside but didn’t resist there.

Gravestone Doji candlestick pattern

8. Hammer candlestick pattern:

Hammer appears green or red small body in colour has a long wick on the downside showing the opening and closing of the candlestick. It forms in the downtrend and represents the temporary bottom of that downtrend. Long wick represents the stoppage at price going down and it may tend to reverse upside. To trade this candlestick, wait for the next candle to appear in the upside direction.

Specification: The wick of the candle should be double the size of the body. The colour of the candle doesn’t matter as the size of the body is small.

Hammer candlestick pattern

9. Inverted hammer candlestick:

The inverted hammer appears in green or red colour small body having a long wick to the upside showing the opening and closing of the candlestick. It also forms in the downtrend and represents the temporary bottom of the prior downtrend. Long wick represents the stoppage at the price going up and it may tend to reverse the downside. To trade this candlestick, wait for the next candle to appear in the downside direction.

Specification: The body of the candle should not be more than half of the wick. The colour of the candle doesn’t matter in This candlestick pattern as the size of the body is small.

Inverted Hammer candlestick pattern

10. Hanging Man:

A candlestick with a long wick to the downside having a small body at the top appears in an uptrend is Hanging man. It gives a good look of a hanging man in the chart. The appearance indicates that the bears are being active and it can be a trend reversal towards the downside. To trade this candlestick, wait for confirmation until the next one appears in the downward direction.

Specification: The colour of the body doesn’t matter and the wick to the downside should be long.

Hanging man pattern

11. Shooting Star:

This candlestick is of a long wick to the up but has a small body of green or red colour. It appears in the uptrend when bears get more active than bulls by controlling the price movement in the uptrend and it increases the probabilities of trend reversal towards the downside.

Specification: The wick to the upside should be long and the colour of the body doesn’t matter.

Shooting Star

12. Piercing bullish pattern:

In a downtrend, the pattern combines two candlesticks in which green (bullish) appears after a red  (bearish) one with a gap-down opening and retracement closing of more than 50%. This shows the active presence of bulls in a bearish trend near the bottom and the high probability of a trend reversal. 

Specification: The second candle i.e. bullish should engulf more than 50% of the previous bearish candle.

Piercing pattern

13. Dark cloud cover:

In an uptrend, the pattern is a combination of two candlesticks in which a red (bearish) candlestick appears after a green (bullish) one and opens a gap up but closes retracing the first one by more than 50% mostly near the top which shows the momentum is shifting towards the downside and it can be a trend reversal. 

Specification: The second candle i.e. bearish should engulf at least 50% of the previous bullish candle.

Dark cloud cover candlestick pattern

These are the main candlestick patterns which occur most of the time and have high reliability depending on the psychology of price. As there are sometimes in the stock market when candlestick patterns fail. If a trader or an investor understands the psychology of the price hidden in the candlestick patterns, he can save his money while knowing which pattern seems like a good candlestick pattern but have less chance of success.

List of all candlestick patterns

There are a total of 49 candlestick patterns. Here is the list of all candlestick patterns in the Stock market.

Cheatsheet candlestick patterns

Psychology of candlestick patterns

The question usually arises in the mind of a trader or an investor is why candlestick patterns show an excellent level of accuracy. It is because of the psychology of the price hidden behind the price action.

Candles give the open, close, high and low data of a particular timeframe. At a very particular timeframe, if the price is planning to reverse, it shows some signal which is most of the time a true signal. Remember, there is always the psychology of the market participants hidden behind the flow of the price. The patterns help to reveal the very same market psychology of the mass.

For example: If the Car has to make a u-turn, there is some signal a car gives while taking a U-turn. That can be a loss of momentum, a sudden momentum to the opposite side, or a sign of pause which shows confusion.

Hammer and Bullish Engulfing candles are examples of the psychology of the price where price takes a strong u-turn to the upside from his prior trend i.e. downside. Both patterns show that the trend is about to an end because the pressure of buying is dominating the prior pressure of selling.

Morning Star and Piercing patterns are examples of the losing momentum of the prior trend. The price is in a downtrend and the Morning Star forms. The pressure of the selling has decreased in a context that now the price has taken a pause and it is planning to make a U-turn. No new positions of the short selling can be made by a trader at these critical times. The same is shown in the piercing pattern.

Doji Candle shows that the price is not sure which direction it is about to go. There are times in the market when the market participants themselves are unsure where to move. These times can be Budget time, Election time, Wartime or many other circumstances that occur when price takes a pause and let the market participants decide where to go.

Understanding candlestick patterns is all about judging the behaviour of the price with which a trader can easily track the right signal of the reversal.

Candlestick patterns are highly reliable in which timeframe?

Candlesticks are available on technical charts in almost every timeframe including second, minute, day, week and month.

You can use any one of them for trading but when it comes to the reliability of the patterns; the higher the timeframe, the more the reliability. As the price fluctuates up and down every single second during live market hours, it is quite difficult to handle the noise of small timeframes which somehow can affect your trading psychology. It matters if you are an intra-day trader or the positional trader, the timeframe to be used to play moves with candlestick patterns matters. 

Most of the time, a trader do the mistake of going into a much inner timeframe than is recommended. It feels a glimpse of ease while checking the price into the inner timeframe, but it is only an illusion. Suppose, you are having a trade in an hour’s timeframe. It took a lot of patience to wait for the price to do what it actually wanted to do. 

In the meantime the trader clicks the inner time frame to check what’s happening in a short interval of time, let’s say 15 mins. That is the moment when a trader gets trapped in the hypnosis of the continuous flow of a single tick-price moment. 

A single candle of 5 mins is telling that the price is bearish and it is of course bearish at the time of 5 mins but not at the hour frame. A trader usually forgot the accurate timeframe at which he is working and square-off its position.

The second thing is that, in a smaller timeframe, it is not more reliable than in a bigger timeframe. A trader if working at an hour timeframe and the hour of the moment is showing bullishness, should stick to his analysis rather than go into the inner timeframe and get stuck into noise.

For intraday trading, 5 minutes candlestick is mostly used which is quite noisy due to fluctuations. The candlesticks in 15- and 30-minute timeframes are more reliable for day trading.

For swing trading, choose at least 1 hour and longer timeframe candlesticks for more reliability.

For positional trading, choose to analyze at least a day and longer timeframe candlestick patterns for more reliability.

For investment purposes, week and month candlesticks are best to analyze for more reliability.

Candlestick patterns with other indicators

No doubt candlestick patterns have in itself high reliability. Still, to increase an edge in stock market trading, a trader can use other indicators as a confirmation of the price.

Candlestick patterns with support and resistance

Check if the candlestick pattern is formed at the previous support or the resistance of the price. This can give us a confirmation as the price shows much accuracy to take a turn with the double confirmation.

Candlestick with support and resistance

Candlestick patterns with the moving average

When the price touches the moving average and forms a reliable candlestick pattern, it is also the best time to make a trade as the price is confirmed in a double way. The pattern is forming and showing confirmation of the moving average is a good trade to take.

Candlestick pattern with moving average

Candlestick patterns with Elliott wave theory

If you are familiar with the Elliott wave theory, wave 2 and wave 4 are good dips which give a trader a very good opportunity to buy. At those dips, the candlestick patterns form most of the time. This can be a golden trade to take.

Candlestick with Elliott wave pattern

Candlestick patterns with RSI divergence

In the positive divergence of the RSI, the price most of the time forms a hammer, bullish engulfing or the morning star. The best time to buy the dip and ride a good move. Same like, in the negative divergence of the RSI, the candlestick patterns like hanging man, and shooting star have a higher chance to form. 

Candlestick pattern with RSI

Candlestick patterns with volume confirmation

With any bullish signal of the candlestick pattern, if the volume is high as compared to previous candles, it is a good sign to buy. Same as, if the bearish signal comes in the candlestick pattern with a high volume, it is likely to sell a stock.

Candlestick with volume

Chart Analysis with candlestick patterns

Here we analyse two charts which can help you understand how to analyze the price with candlestick patterns. With this approach, a trader can see how to trade with a candlestick with regard to risk management i.e. where to put stop-loss and target.

Nifty Daily Chart Dark cloud Candlestick Pattern Analysis 

As we can see in the chart below, the last candle of the daily timeframe in Nifty 50 engulfs 50 % of the previous bullish candle. In an uptrend, the opening of the bearish candle is above the closing of the previous candle. It fulfils all the requirements of the Dark cloud pattern of the candlestick pattern. 

The price should move down with the preferred stop loss of the last candle’s high.

Dark cloud nifty candlestick analysis

Dow Jones Industrial Average Index chart Evening Star Candlestick Pattern

In the chart of the Dow Jones Industrial Average below, the latest three candles are forming an Evening Star candlestick pattern. In an uptrend, the bullish candle is paused by the second last candle, which is also a shooting star in itself. After that, the last candle absorbs the bullish candle fully. These three candles met all the requirements and make it a perfect Evening star pattern.

The price of the Dow Jones Industrial average should fall down with the stop-loss of the high of the second last candle.

Dow jones Evening star Candlestick analysis

Trading with candlestick patterns can give you a good edge with proper risk management. Also, practising the charts will make more edge in your trading.