Stock Market Basics: Candlestick Patterns - ToughNickel - Money
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Stock Market Basics: Candlestick Patterns

Gordon Ramsay started his television career with the show "Boiling Point" and has been a star ever since.

Munehisa Homma is known as the "Father of the Candlestick Chart."

Munehisa Homma is known as the "Father of the Candlestick Chart."

Origins of the Candlestick Pattern

An important aspect of technical analysis is the ability to read candlestick patterns. The candlesticks provide a graphical representation of price movement. Each candlestick represents a period of time which can span seconds, minutes, hours, days, weeks, months or years.

Candlesticks are a powerful tool used by veteran traders in order to predict the movement of stocks.

Candlesticks would show if a stock is on the uptrend, on the downtrend, moving sideways, consolidating, breaking down or breaking out.

While we can always use figures in terms of the highs and lows and opens and closes of the day, a candlestick provides a more accessible and easier to recognize means of examining the price movements of a stock.

The candlestick patterns can be traced back to a Japanese rice merchant named Munehisa Homma. Known as the "Father of the Candlestick Chart," Munehisa was already trading in a form of rice futures where instead of delivering rice on the spot, he had a system that used coupons that promised delivery of rice at a future time.

Homma was a trader before his time as he wrote the book The Fountain of Gold - The Three Monkey Record of Money back in 1755. Even before the Industrial Revolution, he already knew the concept of a bear market, a bull market, market volume and position trading.

Steve Nison brought the concept of candlestick patterns to the Western world through his book Japanese Candlestick Charting Techniques. Nowadays, Steve continues to lend his expertise to individual and institutional investors. He combines candlesticks and indicators in order to stay ahead of the competition.

The Basics

Basic candlestick patterns are either bullish, bearish or dojis.

Basic candlestick patterns are either bullish, bearish or dojis.

This illustration shows the parts of a candlestick.

This illustration shows the parts of a candlestick.

Bullish Candlestick - A bullish candlestick is a candlestick that closes higher than what it opens for.

Bearish Candlestick - A bearish candlestick is a candlestick that closes lower than what it opens for.

Doji - It is pattern that is formed when the opening and closing prices are almost the same.

Advanced Candlestick Patterns

Advanced candlestick patterns will help you identify trends for a longer period of time.

Advanced candlestick patterns will help you identify trends for a longer period of time.

stock-market-basics-candlestick-patterns

Morning Star

The Morning Star Pattern is generally seen as a bullish reversal pattern which usually occurs at the bottom of a downtrend.

The first component of the pattern is a large bearish red candle that seems to sink the stock even further. We would usually see new lows in this case.The bears are still clearly in control.

The second component of the pattern is a bearish gap down which could end up positive, negative or neutral.

The third component is a bullish gap up where it is a clear sign that the bears have ceded control to the bulls. The bulls then make a run and the stock begins to recover.

stock-market-basics-candlestick-patterns

Evening Star

The Evening Star Pattern is generally seen as a bearish reversal pattern which usually occurs at the top of an uptrend.

The first component of the pattern is a large bullish red candle that seems to propel the stock upwards even further. We would usually see new highs in this case. The bulls are still clearly in control.

The second component of the pattern is a bullish gap up which could end up positive, negative or neutral.

The third component is a bearish gap down where it is a clear sign that the bulls have ceded control to the bears. The bears then help precipitate the stock's movement downward and ends the stock's bullrun.

stock-market-basics-candlestick-patterns

3 Black Crows

The three black crows pattern are made up of three long bodied bearish candles that look like a staircase going down. These candles close near the low price of the period.

The three black crows pattern happens after an uptrend with relatively low volume. The three crows themselves have relatively high volume.

They indicate a reversal of an uptrend.

stock-market-basics-candlestick-patterns

3 White Soldiers

The three white soldiers pattern are made up of three long bodied bullish candles that look like a staircase going up. These candles close near the high price of the period.

The 3 white soldiers pattern happens after a downtrend. The three soldiers themselves have relatively high volume.

They indicate a reversal of a downtrend.

stock-market-basics-candlestick-patterns

Bullish Harami

A bullish harami is a signal many people are looking for to reenter the stock. A bullish harami is a signal that the downtrend is over and that a reversal may be underway.

A bullish harami indicates the start of the party as the downtrend has ended and the uptrend begins.

"Harami" is the Japanese word for "pregnant." This is because the harami configuration resembles that of a pregnant woman.

The pattern has a downtrending candle followed by a smaller one that is on a slight uptrend.

stock-market-basics-candlestick-patterns

Bearish Harami

The bearish harami is the signal that it is time to selloff the stock. A bearish harami is a signal that the uptrend is over and that a reversal may be underway.

While a bullish harami signals the start of the party, the bearish harami signals the end of it.

"Harami" is the Japanese word for "pregnant." This is because the harami configuration resembles that of a pregnant woman.

The pattern has a uptrending candle followed by a smaller one that is on a slight downtrend.

stock-market-basics-candlestick-patterns

Bullish Engulfing

A bullish engulfing pattern is formed when a small red candlestick is followed by a long green candlestick.

Though the first half of the trading day may belong to the bears leading to a lower low, the bulls seize control in the later half of the day and lead to a higher high.

This is an important candlestick to watch as it is an indication of a trend reversal in a positive direction.

stock-market-basics-candlestick-patterns

Bearish Engulfing

A bearish engulfing pattern is formed when a small green candlestick is followed by a long red candlestick.

Though the first half of the trading day may belong to the bulls leading to a higher high, the bears seize control in the later half of the day and lead to a lower low.

This is an important candlestick to watch as it is an indication of a trend reversal in a negative direction.

stock-market-basics-candlestick-patterns

Hammer

A hammer candlestick is a candlestick that looks like a hammer thus the name. It has a long lower wick, a short body and may or may not have a short upper wick.

When a hammer is seen during a downtrend, it may mean that a reversal is about to take place and that an uptrend may happen soon.

After a hammer is spotted, you may wait to see if a confirmation candle would be seen the next trading day to confirm that an uptrend is indeed taking place.

stock-market-basics-candlestick-patterns

Inverted Hammer

The inverted hammer looks like an upside down version of the hammer candlestick pattern.

An inverted hammer that appears in a downtrend is bullish in nature and signals a reversal and the start of an uptrend.

The bullish inverted hammer is a good signal to enter the stock.

The inverted hammer that appears in an uptrend is bearish in nature and signals a reversal and the start of an downtrend. This type inverted hammer is also known as a shooting star.

The bearish inverted hammer/shooting star is a good signal to exit the stock.

stock-market-basics-candlestick-patterns

Tweezers

The bullish tweezer bottom is a sign of a positive reversal. The first candle is controlled by the bears and they successfully push prices lower. The second candle is a complete reversal where the losses on the first candle are recouped on the second candle. This happens in a downtrend.

The bullish tweezer top is a sign of a negative reversal. The first candle is controlled by the bulls and they successfully push prices higher The second candle is a complete reversal where the gains on the first candle are negated by the second candle. This happens on an uptrend.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2018 Jan Michael Ong

Comments

Jason Behm from Cebu, Philippines on December 09, 2018:

Thanks Jan for that. It was indeed a big help especially for those novices and interested in stock market. And very true that it is not just limited to affluent people but for everyone.

Jan Michael Ong (author) from Metro Manila, Philippines on December 09, 2018:

Hi Jason glad to help. I write stock hubs to help new people.

Jason Behm from Cebu, Philippines on December 09, 2018:

This is very helpful. I am a beginner in the stock market and this is a help to analyze and make good decisions but still has to consider other things though. Still a million thanks to this hub!! :)

Jan Michael Ong (author) from Metro Manila, Philippines on November 15, 2018:

Hi Mary analysts say that it would keep going down and will even be worse in December. The US market has had a 10 year bullrun and is due for a bear market. After the bear market though will be a bull market though. On the bright side, once prices bottom out, you can buy stocks at heavily discounted prices.

Mary Norton from Ontario, Canada on November 15, 2018:

Am watching the open now of the stock market as yesterday, this bearish pattern was there so am a bit concerned. This is very enlightening. It is good to observe patterns.