Candlestick patterns are key to understanding the stock market and trade. Identifying a pattern can be the difference between selling or not, here are the main candlestick patterns to keep an eye out.
What are Candlestick Patterns:
Before delving into specific patterns it’s important to have an understanding of what candlesticks are.
Candlesticks illustrate price over a specific period of time on the stock market. On a daily chart, each candlestick represents one day, whereas, on an hourly CandleStick Chart, each candlestick represents an hour. There are two types of full-bodied candles; bullish and bearish.
A bullish candle is usually white or green and means that price action increased overtime period. A bearish candle, on the other hand, is usually black or red and means that price action decreased over the time period. In a lot of ways, bullish and bearish candles are the opposite of one another because on a bullish candle, the opening price is at the base and the closing price is at the top, while the opposite is the case for a bearish candle. What both types of candles have in common is that the highest price is represented at the top of the wick, and the lowest at the bottom. The wick, also known as a tailor shadow, is a line that comes out of both ends of most candles and shows the highest and lowest prices of the period of time the candle represents.
You may also come across a candle without a body, this is known as a Doji and means that the price did not change at all, or did not change significantly for the open and close of the time period. A wick may still be present to mark times during that period where the price rose and fell but did not last long enough to reach the end of the period.
The candlestick patterns to watch out for:
The order and frequency of certain types of candles can suggest that a pattern is emerging, and this can inform business decisions. Here are some of the most important ones:
The Supernova is exactly what the name suggests; an explosion of action. A supernova means that there was a sharp increase in the volume of shares traded in exchange. The rise and peak of a supernova mean that there’s an increase in opportunities to buy in, but traders can cash in on the inevitable decline as an opportunity to short sell. Short selling means selling shares that were borrowed in the hopes of retrieving them when the price drops. Traders can then return the shares to the lender and keep the price difference themselves. Supernovas are unpredictable so be sure to proceed with caution if one occurs. Events such as news, world events, or even a viral post on social media can trigger a supernova.
The Stair Stepper Candlestick Patterns
A stair stepper is like a steadier more stable supernova, rather than the spontaneous sharp rise in price that characterizes supernovas. It’s not always a steady upwards trajectory as there can be brief bearish periods of consolidation which some traders refer to as “sideways price action”, however, star steppers are overwhelmingly bullish. It’s the little periods of sideways price action on the way up that gives this pattern its name as the chart resembles the steps of stairs. Although easier to foresee that a supernova, the steady upwards journey doesn’t always mean that they’re predictable either and they can turn just as fast as a supernova can.
The Crow trend illustrates a steady decline in price action. This is a less than ideal pattern as the stocks and price drop consistently; think of it like price value is being away at by picking crows. The term “Three Black Crows” is commonly thrown around during this period as they are three bearish candles with lower closing prices than their predecessor. This negative pattern can be triggered by regular selling pressure. Sometimes the crow can look like a reverse stair-stepper if there’s resistance to this pressure, a reverse stair-stepper is simply a stair stepper that’s more bearish than the bullish one mentioned above.
The Shooting Star Candlestick Patterns
The image of a literal shooting star may bring forth connotations of an upwards journey. But that’s not the case for this bearish pattern. The name has more to do with the fact that it’s at the top of an uptrend. In addition, can be an indicator of a bearish reversal. It’s easy to confuse a shooting star with an inverted hammer as they both look identical. However, the difference is that a shooting star has to be at the peak of an uptrend, whereas an inverted hammer is in a downtrend. This is why context is integral for making the decision to sell or not.
The Hammer Doji
The Hammer Doji, also known as the Dragonfly Doji, is at the bottom of a downtrend. While this may seem like bad news. It actually can signify that there may be a bullish reversal which means the price will rise again. As a result, this kind of Doji looks more like a nail than a hammer. However, the name derives from the fact that it looks like a nail that’s going down. This is because of the long wick at the end. The long wick means that the price fell during the period. But made its way back up to the opening price.
The Gravestone Doji Candlestick Patterns
The Gravestone Doji is the opposite of a Hammer Doji as it has a long wick on the top. This means that the price rose during the time period. However, did not make it to the end of the selected time. For example, the price rose halfway through an hour chart and then fell back to or close. To the opening price. Although a gravestone Doji can form anywhere. So, when it comes at the top of an upward trajectory. It can mean that the trend could halt or reverse.