How to Read Candlestick Charts Using 5 Reliable Patterns

how to read stock candles

Therefore, a doji may be more significant after an uptrend or long white candlestick. Even after the doji forms, further downside is required for bearish confirmation. This may come as a gap down, long black candlestick, or decline below the long white candlestick’s open. After a long white candlestick and doji, traders should be on the alert for a potential evening doji star. In order to create a candlestick chart, you must have a data set that contains open, high, low and close values for each time period you want to display.

A candle reversal pattern is a type of candlestick formation that can signal a potential trend reversal. Popular candle reversal patterns include the Hammer, Bullish Engulfing, and Bearish Marubozu patterns. A Doji candle is a pattern whereby the open and close prices are almost equal.

  1. Candlestick charts visually represent this data and can provide valuable insights into future market movements.
  2. Generally speaking, each period consists of several data points, including the opening, high, low, and/or closing prices.
  3. If the price continues higher afterward, all may still be well with the uptrend, but a down candle following this pattern indicates a further slide.
  4. The wicks are an asset’s high and low price, and the top and bottom of the candle are the open and close price.
  5. A morning star consists of a red candle, a tiny green one, and a more prominent green candle covering at least half the body of the red one.
  6. However, a doji that forms among candlesticks with long real bodies would be deemed significant.

The engulfing candle can be considered a sign of reversal in the price trend. A bullish engulfing pattern occurs when a large white (or green) real body completely “engulfs” a smaller black (or red) real body from the prior period. ​A bearish engulfing pattern develops in an uptrend when sellers outnumber buyers. This action is reflected by a long red (black) real body engulfing a small green (white) real body. The pattern indicates that sellers are back in control and that the price could continue to decline. After a decline or long black candlestick, a doji indicates that selling pressure may be diminishing and the downtrend could be nearing an end.

The Basics Of A Candlestick

The first candlestick usually has a large real body and the second a smaller real body than the first. The shadows (high/low) of the second candlestick do not have to be contained within the first, though it is preferable if they are. Doji and spinning tops have small real bodies, meaning they can form in the harami position as well. There are also several 2- and 3-candlestick patterns that utilize the harami position. The Inverted Hammer usually appears at the end of a downtrend, indicating a possible change in price direction. This candlestick formation suggests a bullish sentiment, signifying the market’s attempt to push prices higher, as evidenced by the extended upper wick.

The bearish falling tree pattern is particularly helpful for identifying candlestick chart trends. It starts during a downward period and consists of five candlesticks. The pattern begins with a big red candle and ends with another one by the end of the observed period. A bullish rising tree is another common candlestick pattern that consists of five candlesticks. The pattern consists of two bigger green candles at the beginning and end of the observed period and three smaller red candles in between them.

While this may seem like enough to act on, hammers require further bullish confirmation. Further buying pressure, and preferably on expanding volume, is needed before acting. Such confirmation could come from a gap up or long white candlestick. Hammers are similar to selling climaxes, and heavy volume can serve to reinforce the validity of the reversal. The first pair, Hammer and Hanging Man, consists of identical candlesticks with small bodies and long lower shadows. The second pair, Shooting Star and Inverted Hammer, also contains identical candlesticks, but with small bodies and long upper shadows.

how to read stock candles

The bullish harami is the opposite of the upside-down bearish harami. A downtrend is in play, and a small real body (green or white) occurs inside the large real body (red or black) of the previous day. If it is followed by another up day, more upside could be forthcoming. ​A bearish harami is a small black or red real body completely inside the previous day’s white or green real body.

Bullish Harami Cross

Even more potent long candlesticks are the Marubozu brothers, Black and White. Marubozu do not have upper or lower shadows and the high and low are represented by the open or close. A White Marubozu forms when the open equals the low and the close equals the high. This indicates that buyers controlled the price action from the first trade to the last trade. Black Marubozu form when the open equals the high and the close equals the low.

It’s simple to follow, but the line chart may not tell traders much about each day’s activity. It will, however, help traders see trends easily and visually compare the closing price from one period to the next. For example, candlesticks can be any combination of opposing colors that the trader chooses on some platforms, such as blue and red. Candlestick charts originated in Japan over 100 years before the West developed the bar and point-and-figure charts.

This usually signals a potential battle between buyers and sellers, leading to indecision in the market. Depending on preceding candles, a doji candle could signal a reversal of trend or increased momentum in an existing trend. Candlestick patterns represent the psychology are people trading in a market.

A bearish candlestick indicates that the price closed lower than it opened, showing a decrease in the value of the stock or security during the trading period. The most common color to indicate bearish candles is red, but black is also used sometimes. To learn how to read candle patterns, you must first learn to recognize two basic candlestick patterns showing price movement. Trading based on stock candlestick pattern only works if you learn first how to understand candlestick.

Inverted Hammer and Shooting Star

We hope this guide has helped you understand how to read candlestick charts and achieve your trading goals. Remember that you need to take your time, learn the basic patterns, and refrain from relying on a single piece of information while making decisions. Each candle normally represents one day’s price action for a given stock or security but the timeframe can also be adjusted based on preference. Over time, the candlesticks form patterns that traders can use to inform buying and selling decisions. As you can see from the image below the Hammer candlestick formation sometimes indicates a reversal in trend.

Other bearish patterns include the Bearish Harami and Bearish Marubozu, which indicate potential reversal signals after long bullish trends. A candle continuation pattern is formed when the market sentiment remains unchanged and the price increases or decreases in the previous trend direction. A candle reversal pattern, on the other hand, occurs when a stock’s sentiment reverses from bearish to bullish or vice versa. In this case, there is an abrupt change in the direction of the price movement, often indicating a major shift in market sentiment for that particular asset. It could also indicate an opportunity for traders to open a position in anticipation of further price movements in that particular direction.

The same would apply to the lower shadow if the security opened or closed at its lowest point. Let’s analyze the SPY stock candlestick chart below together to understand what to pay attention to. And the price action is easier to interpret at a glance, which is why you need to get a grasp of stock candlestick meaning. Candlestick stock charts depict price action in a visually appealing way by tracking the movements of securities better than old-school bar charts or line chart. Traders can take advantage of hammer formations by executing a long trade once the hammer candle has closed.

Prices move above and below the opening level during the session, but close at or near the opening level. Neither bulls nor bears were able to gain control and a turning point could be developing. According to Steve Nison, candlestick charting first appeared sometime after 1850. Much of the credit for candlestick development and charting goes to a legendary rice trader named Homma from the town of Sakata. It is likely that his original ideas were modified and refined over many years of trading, eventually resulting in the system of candlestick charting that we use today.

Traders can use candlestick signals to analyze any and all periods of trading including daily or hourly cycles—even for minute-long cycles of the trading day. Based on my research, the best candles to trade are Inverted Hammers, Bearish Engulfing, Gravestone Dojis, Bearish Marubozus, and Harami patterns. Candles that are more reliable can help traders make profitable trades with higher accuracy, while less reliable candles increase risk and may not yield any return on investment. I use Candlestick charts exclusively when doing my analysis when you get used to how they work; they provide an unparalleled inside into the short-term market dynamics of a given stock.