Learn to interpret Candlestick to understand buyers/seller actionHistory of Candlestick

It is believed that usage of candlestick originated from Japan in 1700 by rice traders. Over years, its popularity grew significantly as more and more analyst found value in using them. Currently, there are more than 100 patterns recognized based on candlestick formations. In this era you will hardly find one charting tool that does not have candlestick charting in it. That itself speaks on the value that this way of representation provides.

What is Candlestick?

Candlestick is one of the most popular ways of representing price movement of a stock in graphical manner. To give context of where candlestick fits, it may be useful to mention other common type of charts. They are line chart, bar chart etc. A simple example of all three types

Composition of Candlestick

A candle stick composes of four different points of price movement in a day. They are Open Price, Close price, High Price, Low Price.

Parts of candlestick

1. Candle Body: Using these four prices, a candle stick is drawn in such a way that the range of opening price and closing price is plotted as a candle (rectangular structure). The higher the difference between Opening and closing price, the higher is the length of the candle. The width of the candle is more than width of the standard line and is generally kept in such a way it is quite easily visible.

2. Candle Wick (Shadow): Candle wick is a thin line at top & bottom of candle body. This line starts from centre of top and bottom portion of candle.

a. Upper-wick: It is a thin vertical line drawn from centre of top end of the body to the highest price of the day.

b. Lower-wick: It is a thin vertical line drawn from centre of bottom end of the body to the lowest price of the day.

Types of candlestick

Bullish: A bullish candlestick is formed when the closing price of the share is more than the opening price.

Bearish: A bearish candlestick is formed when the closing price of the share is less than the opening price.

Doji: A doji candlestick is formed when closing price is same as opening price.

Understanding candlestick to gauge market sentiment

Single candle: As we have learn how a candle stick is formed. Now let’s try to understand on what we can make out of it. In simplest form, a bullish candlestick denotes that there was some optimism on the stock price upward move at the end of the candlestick period. And in the same way a bearish denotes general pessimism on the stock.

On carefully observing them, it provides more than open, close, high & low price. It can tell how market perceives the stock on a given day. For example if the close price is much higher than opening price (long candle) then it denotes general bullish sentiments on the stock. In other word when the stock opened the buy sentiment was much lesser than towards the end of the day, or buying pressure was more than selling pressure. This indication is more when the upper wick is small.

Similarly, when closing price is much lesser than opening price then it signal weakness in the stock a small body with small wick signals less volatility in the stock, also known as Doji. A small body with very long wicks means lack of direction on the price movement and coupled with huge volatility.

Multiple candle stick pattern

As we now understand what a single candlestick can provide. Similarly, when more than one candle stick in combination can provide very meaningful interpretations on price movements, trend continuation, trend reversals etc.

Colour convention in Candlestick

Initially, bullish candle stick were kept blank (white colour with black border) and bearish candlestick were filled with black colour. This however, is not universal convention. Different tools uses different colour scheme. We at our site always believe in keeping things simple and obvious convention so that our visitor can concentrate on the actual analysis rather than trying to understand the conventions. Continuing with the same philosophy, we colour bullish candlestick in green (denoting bullish sentiment) so that user can look to invest provided other parameter are supportive. And bearish candlestick as red to give a warning to the investor of looming negativity in the stock.

Advantages of candlestick

1. It provides more information than just price point. 2. Patterns formed by candlestick are easier to identify. 3. They can provide important trend reversal. 4. They provide latest market mood in a very easy form. 5. They can be used in conjunction with other indicators.

Now we have understood what candlestick pattern is. Now it’s time to look into some of the most commonly formed patterns. We have categorized them into following categories. Please follow these links to find about these patterns. We have explained them in details and provided you with ample real life examples of them.

Tutorial on Bullish Engulfing Candlestick Pattern

What is Bullish Engulfing Pattern?

Bullish Engulfing Candlestick Pattern generally forms at the bottom of a downtrend, during a decline or near a potential support. Basically it is made up of two candlesticks or can say it takes 2 day for the pattern to form.

1. Day 1 (Smaller Bearish Candlestick): On Day 1, a bearish candlestick (Open price is higher than the close price) is formed shown as red candlestick in the Figure.

2. Day 2 (Larger Bullish Candlestick): On Day 2, a bullish candlestick (open price lower than the close price) is formed which completely covers or engulfs the body of bearish candlestick formed on Day 1, shown as green candlestick in the below Figure.

The name of this pattern is derived from the same fact that, Day 2 candlestick completely engulfs the Day 1 Candlestick.

For this pattern to be formed it is extremely important: The open price of the Day 2 candlestick is lower than the close price of Day 1

candlestick. The close price of the Day 2 candlestick is higher than the open price of Day 1

candlestick.

Bullish Engulfing Candlestick Pattern is a very common trend reversal pattern. Though it is not easy to pick this pattern but if done correctly one can easily catch the trend reversal/buying Signal, and its highly rewarding.The strength of this pattern is increased by the size of the engulfing candlestick. The bigger the engulfing candlestick the more significant is the pattern. The first day the small bearish candle may looks like a continuation of downtrend but its small size irrespective of wicks may show

that the bearish signal is weakening. This is confirmed by the long bullish candlestick formed the next day. The larger candlestick tells a lot more about the market sentiments that the bull is taking over the bear.

On combining this pattern with any other technical indicators like Volume, Stochastic, RSI, MACD etc., further confirms this pattern and one can quickly pick up the trend change or the buy signal. For example evidence of higher volume on the third day further strengthens this pattern reliability. Similarly a price gap up the next day (Day 3) supports further, this pattern of trend reversal.

Corresponding Patterns of Bullish Engulfing is as follows

1. Bearish Engulfing 2. Three Outside Up

Now we have learnt what Bullish Harami candlestick is, it’s time to see them in real life. Our website provides free stock screening based on Bullish Harami Candlestick Pattern.

Example of Bullish Engulfing Candlestick Pattern: Axis Bank Ltd

Tutorial on Bullish Harami Candlestick PatternWhat is Bullish Harami Candlestick Pattern?Bullish Harami Pattern is formed at the bottom of a downtrend or near a significant support. This pattern is made up of two Candlesticks or can say it takes 2 days for this pattern to form.

First Day: A Long bearish candlestick is formed, shown in red in the fig below.Second Day: A small bullish candlestick is formed shown in green in the fig below.

The pattern got its name because in Japanese: Harami means pregnant or body within. In this pattern a small bullish candlestick is formed on day 2 which lies within the body of the bearish candle formed on day 1. Or people say the big bearish candlestick of Day 1 gives an impression of a lady and the small bullish candlestick formed on Day 2 is the protruding baby bump of that lady.

For this pattern to form it is very important that:

1. The open price of the Day 2 candlestick is higher than the close price of Day 1candlestick.

2. The close price of the Day 2 candlestick is lower than the open price of Day 1 candlestick.

Bullish Harami pattern is considered to be a trend reversal pattern, giving investors the buy signal indicating that the bear run is over and bull is taking over the market.

The size and location of the bullish candlestick formed on Day 2 will tell more about the magnitude of this pattern. The bigger bearish candle of Day1 and a comparably small bullish

candle of Day 2 represent strong trend reversal. Similarly if the Bullish candle formed on Day 2 is located near the bottom of the Bearish candlestick formed on Day 1 then one can say the uptrend may be slow, but if it lies in the mid or near the top side of the bearish candle one can say the reversal is moderate to strong.

Precaution to be taken while utilizing this Pattern

1. It is important to reconfirm the pattern by integrating this pattern with the study of other technical indicator.

2. Like if this pattern is formed at the bottom of a downtrend together with overbought condition then it further strengthen strong buy signal. If it is formed in an uptrend it is of no significance.

Volume: Volume plays important role is the confirmation of this pattern. A high volume or a gap up next day reconfirms further trend reversal.

Example of Bullish Harami Candlestick Pattern: Reliance Industries Ltd