Candle Stick Patterns & What To Expect

Candlesticks are used to identify trading patterns. Patterns in turn help the technical analyst to set up a trade. These patterns are formed by grouping two or more candles in a certain sequence. However, sometimes powerful trading signals can be identified by just a single candlestick pattern.

Hence, candlesticks can be broken down into single candlestick pattern and multiple candlestick patterns.

Under the single candlestick pattern we will be learning the following. 

1. Marubozu

-Bullish Marubozu

-Bearish Marubozu

2. Doji

3. Spinning Tops

4. Paper umbrella

-Hammer

-Hanging man

5. Shooting star

Multiple candlestick patterns are a combination of multiple candles. Under the multiple candlestick patterns we will learn the following:

1. Engulfing pattern

-Bullish Engulfing

-Bearish Engulfing

2. Harami

-Bullish Harami

-Bearish Harami

3. Piercing Pattern

4. Dark cloud cover

Of course, you must be wondering what these names mean. As I had mentioned in the previous chapter, some of the patterns retain the original Japanese name.

Candlestick patterns help the trader develop a complete point of view. Each pattern comes with an in-built risk mechanism. Candlesticks give an insight into both entry and stop loss price.

Few assumptions specific to candlesticks

Before we begin learning about the patterns, there are a few additional assumptions we must keep in mind. These assumptions are candlestick-specific. Pay close attention to these assumptions, since we will return to them frequently in the next sections.

These assumptions may not be entirely evident to you at this moment. I will discuss them in greater depth as we continue. Nonetheless, bear the following assumptions in mind:

• Buy strength and sell weakness – Strength is represented by a bullish (blue) candle and weakness by a bearish (red) candle. Hence whenever you are buying ensure it is a blue candle day and whenever you are selling, ensure it’s a red candle day.
• Be flexible with patterns (quantify and verify) – While the text book definition of a pattern could state a certain criteria, there could be minor variations to the pattern owing to market conditions. So, one needs to be a bit flexible. However, one needs to be flexible within limits, and hence it is required to always quantify the flexibility.
• Look for a prior trend – If you are looking at a bullish pattern, the prior trend should be bearish and likewise if you are looking for a bearish pattern, the prior trend should be bullish.