Different Types of Candles in the Stock Market
In our previous article, I have explained the technical analysis and its importance. Therefore, in this article, we will like to cover “What are different types of candles in the stock market ?” In addition, we will study How to read candlestick charts especially if you’re a beginner. This article is created keeping in mind the beginner’s approach to understanding and interpreting the candlestick charts for advanced analysis. In case you have not checked the previous article, do click here:
Candle Stick Chart
Candlestick charts are one of the tools of technical analysis used by traders to predict price movement. This analysis is based on past data related to price/volume. We are well aware that trading is often dictated by emotions of greed and fear.
If you understand patterns and trends, candlestick charts may provide you with a wealth of information. Understanding the various types of candlesticks can help you in extracting better information in combination with these patterns. Therefore, resulting in more successful and potentially profitable decisions.
How to Read Candlestick Charts for Beginners?
Let’s understand how one can interpret the candle chart and what it signifies.
A candle shows the opening, closing, high, and low price for a certain period. When a candle goes up in a period, it is green in color. On the other hand, if it goes down, it is red. An example of this is given in the illustration below.
Alternatively, the first deal of the day starts at the opening price. Further, it drifts around until the last trade of the day finishing at the closing price. If It’s a green candle, then there is a rise in price at the closing time. Whereas, if it’s a red candle then the price got dipped from the opening price.
Take note of the lines that run above and below the candle’s main body. Even if it did not open or close at those prices, this is where the price varied. The wicks or shadows are thin vertical lines above and below the true body that represent the trading session’s high and low prices.
What are Different Types of Candles in the Stock Market?
There are various types of candlestick charts to estimate the possible price movement. However, we will discuss a few handfuls of candlestick charts that are used commonly among the trader class.
Hammer Candle Stick Pattern
This is the most common pattern and truly lives its name. The hammer is when the price opens, drops a little, then rises again to close just below the opening price. This candle’s genuine body is small and positioned at the top, with a lower shadow that should be more than twice the size of the real body. The upper shadow on this candlestick chart pattern is either absent or minimal.
When you start studying the candlestick charts, many times you will come across the big candles pattern which is self-explanatory. Big candles signify the major difference in opening and closing prices. During the candle’s lifetime, it notifies us about the present supply and demand. A large candlestick that falls in price indicates that supply was substantially larger than demand at the time. If the price of the candle rises, demand outnumbers supply.
The Doji stick pattern is formed when the market opening price is the same as the closing price of the security. A Doji means neither the buyers nor the sellers are gaining – it’s a sign of indecision. While some traders feel that when evaluated alongside other candlestick patterns, the Doji suggests an impending price reversal, this is not necessarily the case. You might be able to learn more about how the stock price will go if you combine them with other candlestick patterns.
In continuation to same, will discuss Morning Star and Evening Star Dojis. Both these dojis patterns indicate the possible trend reversal. The morning doji star is formed when the candles are traveling down and then hit a Doji and start moving up. An evening Doji star is an inverse pattern when the Doji signifies a trend reversal going down.
This Dojis will not help in identifying which stocks to buy instead it will tell the right time to enter the market after the stock bottomed out and showed promise for growth.
Bearish Harami/Bullish Harami
In case you have been in the stock market for a while you must have understood the concept of bearish and bullish. Bearish harami is a pattern of candlestick in which a large candlestick is followed by a small candlestick that lies within the body of the large candlestick. That signifies a reversal of the trend as the market is going to be bearish.
On the other hand, Bullish harami gets formed when the large red candlestick is followed by a green small candlestick which signifies that bulls are back in the market and shows positive sentiment towards the market.
These two patterns definitely indicate that the current situation is going to change soon and you should take the positions accordingly.
Engulfing Bearish/Engulfing Bullish
As the name suggests it going to engulf the current situation and represent a new trend. In the case of this chart, the small candle is followed by a large candle which basically covers the first one fully. Therefore, in case of engulfing bearish, a small green candle is followed by a large red candle signifies the downward trend due to fear in the market.
Alternatively, engulfing bullish is formed when a small red candle is engulfed by a large green candle means positive sentiments are there in the stock and will show an upward trend.
Just to summarise, I would say candlestick charts are used to gauge the emotions surrounding a stock or security. If we try to study the candlestick chart you may find different combinations of these charts. But in the end, you should know what information is getting derived from these patterns and how these trends can be utilized to predict future prices and best entry-exit points.