Candlestick Patterns How to Identify and Interpret Trading Signals

  1. Technical Analysis
    1. How Technical Analysis Can Help You Make Informed Decisions in Mastering Stock Trading
    2. Technical Analysis Setting Realistic Expectations
    3. Introduction to Technical Analysis and Assumptions
    4. Technical analysis for Profitable Trades Analyzing Open, High, Low, and Close
    5. Candlestick Charts How Line and Bar chart Enhance Market Analysis
    6. Japanese Candlesticks History, Anatomy From Ancient Japan to Global Trading Phenomenon
    7. Time Frames in Technical Analysis Unlocking the Power of Choosing the Right Interval for Successful Trading strategy
    8. Candlestick Patterns How to Identify and Interpret Trading Signals
    9. Marubozu and Bullish Marubozu Understanding What is Essential Single Candlestick Patterns for Traders
    10. Marubozu Candlestick Setting Stop Loss The Ultimate Guide to Trading Patterns
    11. Spinning Top Candlestick Navigating Downtrends A Trader’s Guide to Identifying Reversal Signals
    12. Spinning Top and Doji How to Interpret and Navigating Market Uncertainty
    13. Paper umbrella and hammer candlestick pattern Unlock Profitable Trades
    14. Hanging man candlestick pattern Profitable share market trading Strategies
    15. Shooting Star Candlestick Pattern Boost Your Trading Success Guide
    16. Engulfing Patterns and Bullish Engulfing Signals Unlock Trading Opportunities
    17. Bearish Engulfing and Doji for Trading Success Profitable Strategies with Candlestick Patterns
    18. Multiple Candlestick Patterns Insights and Strategies Boost Your Trading
    19. Bullish Harami Candlestick Pattern for Trend Reversal Strategies
    20. Shorting Guide using the Bearish Harami Pattern Trade Reversals with Confidence
    21. Morning Star Candlestick Pattern and Gap Analysis To Maximise Your Profits
    22. Evening Star Candlestick Pattern Learn How to Identify and Trade to Boost Your Trading Success
    23. Support and Resistance Basics A Comprehensive Guide to Setting Targets and Navigate the Markets with Confidence
    24. Support and Resistance Learn How to Draw and Identify Key Levels Unlocking Trading Opportunities
    25. Support and Resistance Advanced Trading Strategy Analysing Reliability and Optimisation
    26. Volume Trends How to Leverage for Successful Trading Strategy
    27. Volume Analysis A Key Checklist for Successful Stock Trading
    28. Moving Averages A Comprehensive Guide for Trend Analysis in Stock Trading
    29. How to Use Moving Averages for Profitable Trading Strategy and Potential Opportunities
    30. Moving Average Crossover Boost Your Trading Success with A Reliable Strategy
    31. Technical indicators How to Use Technical Tools for Better Decision-Making Unlocking the Power of Trading
    32. Relative Strength Index RSI Analysing Overbought and Oversold Signals to Boost Your Trading Strategy
    33. MACD How to Interpret and Utilize Moving Average Convergence and Divergence for Profitable Trading
    34. Bollinger Bands The Power of Indicators in Trading and checklist
    35. Fibonacci Retracements Unravelling the Power in Stock Markets
    36. Mastering Fibonacci Retracement A Step-by-Step Guide for Effective Trading
    37. Dow Theory Decoding Unveiling the Principles of Technical Analysis
    38. Dow Theory Patterns Unlocking Trading Opportunities with Double and Triple Formations
    39. Trading Range Explained chart indicator example strategy Profit from Market Ranges
    40. Flag Pattern and Range Breakout How to Capitalise Trading Beyond Boundaries
    41. Risk reward ratio Understanding RRR in Dow Theory
    42. Technical Analysis Tools for Traders Charting Software Guide Enhance Your Trading
    43. How to Select Stocks for Trading Success and Building Your Opportunity Universe
    44. Short Term Trading Unleashing the Power of Scalping Strategies
    45. ADX Indicator and 7 more indicator tools for Trend Strength Analysis
Marketopedia / Technical Analysis / Candlestick Patterns How to Identify and Interpret Trading Signals

Technical Analysis assumes that history repeats itself. This concept is essential to understanding how the approach works.

It would be beneficial to investigate this assumption more thoroughly now, as candlestick patterns rely heavily on it.

Let’s assume that some changes in a particular stock have occurred. Let’s call this phenomenon:

Factor 1- The stock has experienced a downward trend in the previous four trading sessions.

Factor 2- Today is the fifth time this stock has seen a decline, but it has experienced relatively low trading volumes.

Factor 3- Today, the stock has traded in a much narrower range than it has over the past four days.

With these influences in the air, let us assume that on the next day, the decline of stock is halted, and it increases to a positive finish. Consequently, the stock rose on the 6th day due to the three elements.

It’s been a few months, and the same set of conditions has persisted for the last 5 trading days. What will likely happen on the 6th day?

We can assume that, as in the past, history tends to repeat itself. However, we must factor in that this is only true if the set of conditions leading up to the event are identical; then, we likely will see a similar outcome.

Thus, it is likely that the stock cost will increase during the 6th trading session once again.

Candlestick patterns and what to expect

The candlesticks are employed to identify trade trends, which in turn give the technical analyst a chance to establish a position. Patterns are created by bringing together two or several candles following a certain order, yet, sometimes, even one candlestick can produce a strong trading signal.

Hence, candlesticks can be broken down into single candlestick patterns and multiple candlestick patterns.

In this lesson, we will cover the single candlestick pattern. 

  1. Marubozu
  2. Bullish Marubozu
  3. Bearish Marubozu
  4. Doji
  5. Spinning Tops
  6. Paper umbrella
  7. Hammer
  8. Hanging man
  9. Shooting star

Multiple candlestick patterns are a combination of multiple candles. Under the multiple candlestick patterns, we will learn the following:

  1. Engulfing pattern
  2. Bullish Engulfing
  3. Bearish Engulfing
  4. Harami
  5. Bullish Harami
  6. Bearish Harami
  7. Piercing Pattern
  8. Dark cloud cover
  9. Morning Star
  10. Evening Star

Without a doubt, you may be pondering the significance of the given titles. As mentioned earlier in the preceding chapter, certain patterns have kept their Japanese origin name.

Candlestick patterns assist traders in forming a comprehensive perspective. These formations feature their risk management system, providing insight into the ideal entry and stop-loss prices.

Few assumptions specific to candlesticks

Before hopping into the material, we should bear in mind a couple of assumptions pertaining to candlesticks. These are imperative for us to understand and remember because we’ll frequently refer back to them later.

At this point, these assumptions may not be clear to you; however, please keep them in the back of your mind as I explain them in depth further on.

  1. Buy strength and sell weakness: Every time you buy, it should be on a bullish (blue) candle day, and when it’s time to sell, make sure it’s a bearish (red) candle day. 
  1. Be flexible with patterns (quantify and verify)– Although the textbook definition of a pattern has certain criteria, there may be slight changes due to market conditions. Therefore, some level of flexibility must be allowed, yet only within predetermined limits; this calls for quantification of such flexibility.
  1. Look for a prior trend – If you’re observing a bullish pattern, the preceding trend should have been bearish, and if it’s the bearish pattern you seek, then the prior trend should have been bullish.

In the following chapter, we’ll start by focusing on single candlestick patterns.