Candlestick pattern

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In financial technical analysis, a candlestick pattern is a movement in prices shown graphically on a candlestick chart that some believe can predict a particular market movement. The recognition of the pattern is subjective and programs that are used for charting have to rely on predefined rules to match the pattern. There are 42 recognised patterns that can be split into simple and complex patterns. [1]

Contents

History

Some of the earliest technical trading analysis was used to track prices of rice in the 18th century. Much of the credit for candlestick charting goes to Munehisa Homma (1724–1803), a rice merchant from Sakata, Japan who traded in the Ojima Rice market in Osaka during the Tokugawa Shogunate. According to Steve Nison, however, candlestick charting came later, probably beginning after 1850. [2]

Formation of candlestick

The aspects of a candlestick pattern Candlestick chart scheme 03-en.svg
The aspects of a candlestick pattern

Candlesticks are graphical representations of price movements for a given period of time. They are commonly formed by the opening, high, low, and closing prices of a financial instrument. [3]

If the opening price is above the closing price then a filled (normally red or black) candlestick is drawn.

If the closing price is above the opening price, then normally a green or hollow candlestick (white with black outline) is shown.

The filled or hollow portion of the candle is known as the body or real body, and can be long, normal, or short depending on its proportion to the lines above or below it.

The lines above and below, known as shadows, tails, or wicks, represent the high and low price ranges within a specified time period. However, not all candlesticks have shadows.

Simple patterns

 
Big-black-candle.svg
Big Black Candle Has an unusually long black body with a wide range between high and low. Prices open near the high and close near the low. Considered a bearish pattern.
Big-white-candle.svg
Big White Candle Has an unusually long white body with a wide range between high and low of the day. Prices open near the low and close near the high. Considered a bullish pattern.
 
Black-body.svg
Black Body Formed when the opening price is higher than the closing price. Considered to be a bearish signal.
White-body.svg
White Body Formed when the closing price is higher than the opening price and considered a bullish signal.
Doji.svg
Doji Formed when opening and closing prices are virtually the same. The lengths of shadows can vary. If previous are bearish, after a Doji, may be ready to bullish.
Long-legged-doji.svg
Long-Legged Doji Consists of a Doji with very long upper and lower shadows. Indicates strong forces balanced in opposition. If previous are bullish, after long legged doji, may be ready to bearish.
Dragonfly-doji.svg
Dragonfly Doji Formed when the opening and the closing prices are at the highest of the day. If it has a longer lower shadow it signals a more bullish trend. When appearing at market bottoms it is considered to be a reversal signal.
Gravestone-doji.svg
Gravestone Doji Formed when the opening and closing prices are at the lowest of the day. If it has a longer upper shadow it signals a bearish trend. When it appears at market top it is considered a reversal signal.
Hammer-candlestick.svg
Hammer A black or white candlestick that consists of a small body near the high with little or no upper shadow and a long lower tail. Considered a bullish pattern during a downtrend.
Hanging-man.svg
Hanging Man A black or white candlestick that consists of a small body near the high with little or no upper shadow and a long lower tail. The lower tail should be two or three times the height of the body. Considered a bearish pattern during an uptrend.
Inverted-hammer.svg
Inverted Hammer A black or white candlestick in an upside-down hammer position.
Shooting-star.svg
Shooting Star A black or white candlestick that has a small body, a long upper shadow and little or no lower tail. Considered a bearish pattern in an uptrend.
Long-upper-shadow.svg
Long Upper Shadow A black or white candlestick with an upper shadow that has a length of 2/3 or more of the total range of the candlestick. Normally considered a bearish signal when it appears around price resistance levels.
Long-lower-shadow.svg
Long Lower Shadow A black or white candlestick is formed with a lower tail that has a length of 2/3 or more of the total range of the candlestick. Normally considered a bullish signal when it appears around price support levels.
Marubozu.svg
Marubozu A long or normal candlestick (black or white) with no shadow or tail. The high and the low represent the opening and the closing prices. Considered a continuation pattern.
Spinning-top.svg
Spinning Top A black or white candlestick with a small body. The size of shadows can vary. Interpreted as a neutral pattern but gains importance when it is part of other formations.
Shaven-head.svg
Shaven Head A black or white candlestick with no upper shadow. [Compared with hammer.]
Shaven-bottom.svg
Shaven Bottom A black or white candlestick with no lower tail. [Compare with Inverted Hammer.]

Complex patterns

 
Bearish-harami.svg
Bearish Harami Consists of an unusually large white body followed by a small black body (contained within a large white body). It is considered a bearish pattern when preceded by an uptrend.
Bearish-harami-cross.svg
Bearish Harami Cross A large white body followed by a Doji. Considered a reversal signal when it appears at the top.
 
Bearish-3-method-formation.svg
Bearish 3-Method Formation A long black body followed by three small bodies (normally white) and a long black body. The three white bodies are contained within this jedi range of the first black body. This is considered a bearish continuation pattern.
Bullish-3-method-formation.svg
Bullish 3-Method Formation Consists of a long white body followed by three small bodies (normally black) and a long white body. The three black bodies are contained within the range of first white body. This is considered a bullish continuation pattern.
 
Bullish-harami.svg
Bullish Harami Consists of an unusually large black body followed by a small white body (contained within large black body). It is considered a bullish pattern when preceded by a downtrend.
Bullish-harami-cross.svg
Bullish Harami Cross A large black body followed by a Doji. It is considered a reversal signal w
Dark-cloud-cover.svg
Dark Cloud Cover Consists of a long white candlestick followed by a black candlestick that opens above the high of the white candlestick and closes well into the body of the white candlestick. It is considered a bearish reversal signal during an uptrend.
Engulfing-bearish-line.svg
Engulfing Bearish Line Consists of a small white body that is contained within the following large black candlestick. When it appears at the top it is considered a major reversal signal.
 
Engulfing-bullish-line.svg
Engulfing Bullish Consists of a small black body that is contained within the following large white candlestick. When it appears at the bottom it is interpreted as a major reversal signal.
Evening-doji-star.svg
Evening Doji Star Consists of three candlesticks. First is a large white body candlestick followed by a Doji that gaps above the white body. The third candlestick is a black body that closes well into the white body. When it appears at the top it is considered a reversal signal. It signals a more bearish trend than the evening star pattern because of the Doji that has appeared between the two bodies.
 
Evening-star.svg
Evening Star Consists of a large white body candlestick followed by a small body candlestick (black or white) that gaps above the previous. The third is a black body candlestick that closes well within the large white body. It is considered a reversal signal when it appears at the top level.
Falling-window.svg
Falling Window A window (gap) is created when the high of the second candlestick is below the low of the preceding candlestick. It is considered that the window should be filled with a probable resistance.
 
Morning-doji-star.svg
Morning Doji Star Consists of a large black body candlestick followed by a Doji that occurred below the preceding candlestick. On the following day, a third white body candlestick is formed that closes well into the black body candlestick which appeared before the Doji. It is considered a major reversal signal that is more bullish than the regular morning star pattern because of the existence of the Doji.
Morning-star.svg
Morning Star Consists of a large black body candlestick followed by a small body (black or white) that occurs below the large black body candlestick. On the following day, a third white body candlestick is formed that closes well into the black body candlestick. It is considered a major reversal signal when it appears at the bottom.
 
On-neckline.svg
On Neckline In a downtrend, consists of a black candlestick followed by a small body white candlestick with its close is near the low of the preceding black candlestick. It is considered a bearish pattern when the low of the white candlestick is penetrated.
Three-black-crows.svg
Three Black Crows Consists of three long black candlesticks with consecutively lower closes. The closing prices are near to or at their lows. When it appears at the top it is considered a top reversal signal.
 
Three-white-soldiers.svg
Three White Soldiers Consists of three long white candlesticks with consecutively higher closes. The closing prices are near to or at their highs. When it appears at the bottom it is interpreted as a bottom reversal signal.
Tweezer-bottoms.svg
Tweezer Bottoms Consists of two or more candlesticks with matching bottoms. The candlesticks may or may not be consecutive and their sizes or colours can vary. It is considered a minor reversal signal that becomes more important when the candlesticks form another pattern.
 
Tweezer-tops.svg
Tweezer Tops Consists of two or more candlesticks with matching tops. The candlesticks may or may not be consecutive and their sizes or colours can vary. It is considered a minor reversal signal that becomes more important when the candlesticks form another pattern.
Doji-star.svg
Doji Star Consists of a black or white candlestick followed by a Doji that gaps above or below these. It is considered a reversal signal with confirmation during the next trading day.
 
Piercing-line.svg
Piercing Line Consists of a black candlestick followed by a white candlestick that opens lower than the low of the preceding but closes more than halfway into the black body candlestick. It is considered a reversal signal when it appears at the bottom.
Rising-window.svg
Rising Window A window (gap) is created when the low of the second candlestick is above the high of the preceding candlestick. It is considered that the window should provide support to the selling pressure.
 
JudasCandle.png
Judas Candle Consists of a large black candle followed by a smaller white candle with a lower tail which is equal to the black candle in length. This is indicative of price capitulation.
DarthMaulCandle.png
Darth Maul The correct term for this candle is a "high wave spinning top", a small candle body with unusually large upper and lower shadows, suggesting that the prior trend has run into a period of indecision. The term "Darth Maul" comes from Star Wars , as the candle looks somewhat like a lightsaber.

See also

Further reading

Related Research Articles

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A candlestick chart is a style of financial chart used to describe price movements of a security, derivative, or currency.

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A chart pattern or price pattern is a pattern within a chart when prices are graphed. In stock and commodity markets trading, chart pattern studies play a large role during technical analysis. When data is plotted there is usually a pattern which naturally occurs and repeats over a period. Chart patterns are used as either reversal or continuation signals.

The hikkake pattern, or hikkake, is a technical analysis pattern used for determining market turning-points and continuations. It is a simple pattern that can be observed in market price data, using traditional bar charts, point and figure charts, or Japanese candlestick charts. The pattern does not belong to the collection of traditional candlestick chart patterns.

Pivot point (technical analysis)

In financial markets, a pivot point is a price level that is used by traders as a possible indicator of market movement. A pivot point is calculated as an average of significant prices from the performance of a market in the prior trading period. If the market in the following period trades above the pivot point it is usually evaluated as a bullish sentiment, whereas trading below the pivot point is seen as bearish.

Three black crows

Three crows is a term used by stock market analysts to describe a market downturn. It appears on a candlestick chart in the financial markets. It unfolds across three trading sessions, and consists of three long candlesticks that trend downward like a staircase. Each candle should open below the previous day's open, ideally in the middle price range of that previous day. Each candlestick should also close progressively downward to establish a new near-term low. The pattern indicates a strong price reversal from a bull market to a bear market.

Open-high-low-close chart

An open-high-low-close chart is a type of chart typically used to illustrate movements in the price of a financial instrument over time. Each vertical line on the chart shows the price range over one unit of time, e.g., one day or one hour. Tick marks project from each side of the line indicating the opening price on the left, and the closing price for that time period on the right. The bars may be shown in different hues depending on whether prices rose or fell in that period.

The doji is a commonly found pattern in a candlestick chart of financially traded assets in technical analysis. It is characterized by being small in length—meaning a small trading range—with an opening and closing price that are virtually equal. The efficacy of technical analysis is disputed by the efficient-market hypothesis, which states that stock market prices are essentially unpredictable.

Hammer (candlestick pattern)

A hammer is a type of bullish reversal candlestick pattern, made up of just one candle, found in price charts of financial assets. The candle looks like a hammer, as it has a long lower wick and a short body at the top of the candlestick with little or no upper wick. In order for a candle to be a valid hammer, most traders say the lower wick must be two times greater than the size of the body portion of the candle, and the body of the candle must be at the upper end of the trading range.

Morning star (candlestick pattern)

The Morning Star is a pattern seen in a candlestick chart, a popular type of a chart used by technical analysts to anticipate or predict price action of a security, derivative, or currency over a short period of time.

Gap (chart pattern)

A gap is defined as an unfilled space or interval. On a technical analysis chart, a gap represents an area where no trading takes place. On the Japanese candlestick chart, a window is interpreted as a gap.

Island reversal

In both stock trading and financial technical analysis, an island reversal is a candlestick pattern with compact trading activity within a range of prices, separated from the move preceding it. A "candlestick pattern" is a movement in prices shown graphically on a candlestick chart. This separation shown on the chart, is said to be caused by an exhaustion gap and the subsequent move in the opposite direction occurs as a result of a breakaway gap.

Marubozu is the name of a Japanese candlesticks formation used in technical analysis to indicate a stock has traded strongly in one direction throughout the session and closed at its high or low price of the day. A marubozu candle is represented only by a body; it has no wicks or shadows extending from the top or bottom of the candle. A white marubozu candle has a long white body and is formed when the open equals the low and the close equals the high.

The Vortex Indicator is a technical indicator invented by Etienne Botes and Douglas Siepman to identify the start of a new trend or the continuation of an existing trend within financial markets. It was published in the January 2010 edition of Technical Analysis of Stocks & Commodities.

Ichimoku Kinkō Hyō

Ichimoku Kinko Hyo (IKH), usually shortened to "Ichimoku", is a technical analysis method that builds on candlestick charting to improve the accuracy of forecast price moves.

Three white soldiers

Three white soldiers is a candlestick chart pattern in the financial markets. It unfolds across three trading sessions and represents a strong price reversal from a bear market to a bull market. The pattern consists of three long candlesticks that trend upward like a staircase; each should open above the previous day's open, ideally in the middle price range of that previous day. Each candlestick should also close progressively upward to establish a new near-term high.

The price action is a method of billable negotiation in the analysis of the basic movements of the price, to generate signals of entry and exit in trades and that stands out for its reliability and for not requiring the use of indicators. It is a form of technical analysis, since it ignores the fundamental factors of a security and looks primarily at the security's price history. What differentiates it from most forms of technical analysis is that its main focus is the relation of a security's current price to its past prices as opposed to values derived from that price history. This history includes swing highs and swing lows, trend lines, and support and resistance levels.

Heikin-Ashi chart

Heikin-Ashi is a Japanese trading indicator that means "average pace." Heikin-Ashi charts resemble candlestick charts, but have a smoother appearance as they track a range of price movements, rather than tracking every price movement as with candlesticks. Heikin-Ashi was created in the 1700s by Munehisa Homma, who also created the candlestick chart. These charts are used by traders and investors in stock, bond, futures, cryptocurrency and forex markets to help determine and predict price movements.

References

  1. "16 candlestick patterns every trader should know" . Retrieved 4 July 2020.
  2. "Introduction to Candlesticks". StockCharts. Stockcharts.com. Retrieved 29 June 2016.
  3. "patterns" . Retrieved 4 July 2020.