Candle Stick Graphs
The candle sticks are, perhaps, the most used graphical representation for technical analysis, because just like the bar graphs, it shows the more information as possible in a same illustration. Through candle sticks, it is possible to find the strict relation between demand and supply, exposing the higher pressures between buyers and sellers. Candle sticks also show trends and strenghts of markets. Besides, the graphs also tell us a lot about the psychology of the investors, allowing some forecasts on pricing, trading and others.
Candles may lead to some patterns – showing low and high trends, market reversals, and much more. In the sequence, we shall have the various types of candle sticks explained and detailed.
The following graphs show patterns to a market where prices are soaring, usually common right after companies decide on realizing profits, or following those troughs in the graphs, which expose it’s a good opportunity for buying shares.
The hammer is formed by a small body on the top of the graph, followed by a long shadow below that, which altogether forms a hammer-shaped candle stick; A small body indicates that opening and closing prices were similar. The shadow below that shows that prices reached a deep trough in the trading session, but low prices was not sustained, and prices closed near the opening price. The shadow on hammers has at least 2.5 times the body’s height, and should have no shadow at the top.
The hammer right after a downward trend. The trading session begins and prices keep falling down, giving signs that the trend will continue, however, the buyers appears, making the asset price closes near the opening price, indicating a weakening of the sellers. If prices exceed the initial levels, a white hammer is formed. A price increase in subsequent trading will increase the credibility of the changing trend, giving confidence to investors to buy more and more.
The inverted hammer has a body on the bottom and a shadow on top. The small body indicates that the opening price and the closing price were close to each other. The shadow on top indicates that prices soar during the trading session, but investors are still pessimistic and the hike was not sustained. The shadow, again must have at least 2.5 times the height of the body, and should not have shadow at the bottom of the body..
This shape appears after a downward trend, with the trading session starting with a hike, due to any news or particular event. However, buyers fail to keep the prices on the hike long enough, and they fall back again, ending the session at levels close to the opening prices. The shape indicates a timid react on prices, frustrated by continuing uncertainties, but the buying pressure is increasing. If the next session shows opening prices above the hammer’s body, it is a sign that the buying pressure is coming hard. Besides, investors buying short will be covering their positions, and that means they’ll need to actually purchase the assets, which might be leading to real chances of hiking.
A bullish engulfing is composed by 2 candles: the first with a smaller and filled body, and the second with a larger and empty body, which engulfs the first body completely.
After a downward trend, selling activities lose their strength, and a buying pressure takes place, creating a push-pull in the prices. In this case, a filled candle is formed. In the next trading session, a new upward candle is formed, engulfing the first. The more the second candle engulfs the first, the better will be the hunch of a hiking trend. Furthermore, this figure will have more credibility if formed on the support of a trend. To confirm the change in trend, it is better to wait for the next trading session, in order to confirm whether the market will rise or fall.
The Harami is also composed with two candle: the first is long and filled in, and the second smaller and empty, completely engulfed by the first one.
The harami is the opposite of the bullish engulfing candle, and shows us that prices resist before keep rising on, which indicates that a downward trends is getting weaker. The candles can be filled or empty. However, when a sequence shows a first candle empty followed by another filled in, this one smaller with short shadows and fully engaged by the first candle, we can read trends with more reliability.
A piercing pattern shows a long and black candle followed by a second candle, this one empty and closing in a level 50% above the previous candle, or higher.
The lower the empty candle starts and the more it pierces the black candle, the more reliable the pattern will be, and the stronger is to be the change of trends. This pattern shows us the market is falling down, where on the last day the market opens below the low of the previous day (also called gap). Prices hike, but sellers are still very active, however, buyers can keep buying forces and imposing a trend change. If the second candle opens below the closing level for the previous day, but above the shadow, so we have an imperfect pattern, but it can still be validated if it closes 50% above the levels reached in the previous candle.
In Doji patterns, openings and closures are pretty close to each other, and shadows are almost even either on top or bottom. Also, they may appear in upward or downward trends.
The doji signs a market indecision, or a balance between buyers and sellers. If a doji pops up in an horizontal trend, it is quite useless to say anything. However, if it is the end of an upward trend or downward trend, it may signal a trend change. If at the end of a downward trend, may mean that sellers are losing strenght, and that buyers are beginning to make transactions. Likewise, if the doji appears at the end of an upward trend, may signal that a change may be coming.
The Dragonfly doji has a huge shadow on the bottom side, and almost none on top. It shows up right after a downward trend.
Dragonfly doji reminds the hammer, but it’s quite more reliable. It appears immediately after a downward trend, when prices are still falling down. So, in a certain trading day, when prices keep dropping, they recover by the end of the session, closing nearthe day’s initial levels, which exposes a reaction from buyers. The next day, it’s time to confirm the trend, and if a white candle comes by the next trading session, then prices shall be raising again
The morning star comprises three candles in sequence. The first is a large down candle. The second one is much shorter, also called star, and can be empty or filled in. The last candle shows a hike, with a large body and closing prices at levels inside the range of the first day.
The filled in candle shows another trading session on the drop. Thereafter, a small candle appears, giving signs of steadiness on prices, and buyers and sellers close to a balance. Right after, a hiking candle is formed, penetrating the body of the black candle of the first day. Like any other candle stick move, the best you can do is waiting until the fourth day to confirm the trend.
The kicking is just formed by two candles, one of them big and filled in and a second also big, but empty. The first is a slowdown candle, while the second is more related with na upward Market, with a gap over the previous candle.
This pattern clearly shows the market is keeping the hikes and the buying trend is strong. None of the candles should have shadows, unless they are really small. The filled in candle shows a persistent falling market. In the subsequential trading session, a gap occurs, and a large and empty candle is formed. Usually, the hikes are great in this day, and delayed investors will be looking for taking advantage in a next session, which gives signs of a turnaround in that downward trend of the first day.
Abandoned baby (either bearish or bullish)
The abandoned baby is formed by three candles – the first large and filled in, a second is a doji, and a third one, medium-sized and empty.
This is the rarest pattern to occur. The first candle shows a downward trending session, where sellers are ruling out. On a second day, buyers and sellers find a point of balance, which hints that those who are sold are not pretty sure of their positions anymore. On a third day, moods change and get confirmed, and buyers advance at full charge, causing a reversal. Remind there will be a gap from the doji, either for the downward candle or the upward one.
Long Legged Doji
The Long legged Doji is similar to the traditional doji, with long shadows and no body.
This pattern represents the indecision and balance between buyers and sellers. Opening and closing prices are almost the same. For an upward pattern to emerge, these candles must be close to a support, and a confirmation needs to come up with a candle in the next trading session. It differs from the doji because the shadows are even longer, showing huge changes on prices in the same day, converging to a closure nearby the opening levels.
The Harami Cross comprises a large and filled downward candle followed by a doji.
The difference between the Harami Cross and the ordinary Harami is that the first has more significant signals of a trend reversal. This pattern exposes a disparity in a trading session. A large and filled in candle is formed, indicating a drop. In the following session, a doji appears, indicating that the selling pressure is about to finish. Like any other pattern, the investor should be waiting for the subsequential day for confirming the trend (upward candle).
The Breakway comprises five candles. The first is a large and filled in downward candle, the following three candles have small bodies, like a shooting star, all of them filled in. The last one is a medium-sized and empty candle (upward).
This pattern represents the infamous “rounded bottom” in a graph, formed by several candles, and showing an oversold, and lower prices do not predominate. Thus, falling prices cannot be kept, and an upward candle strikes out by the next day. A sixth candle, however, will be confirming or not the reversal trend.
Downward Candlestick patterns emerge right after an upward trend, on top of the graphs, nearby the resistance line, and indicate a weakening buying trend with a possible reversal, and price drops as consequence.
This pattern brings a normal body, and can be filled in or empty. After this first candle, there is an opening gap, with a second candle that exceed the top of the first one. The following candle has a small body and a top shadows which has at least the double of the body’s length. This third candle looks like a shooting star, hence the pattern’s name.
The markets are soaring, proving strength for the upward trend. After another hiking day, the session opens with a high gap, and prices increase quickly. However, the trend is not sustainable, as sellers come back, and make prices to close nearby the opening levels, forming a shooting star candle. If the next day brings a downward candle, the reversal is confirmed. The shooting star usually occurs in the resistance of a trend.
The hanging man has a small body, and it can be filled in or empty. It has a long shadow in the bottom, that can be 2,5 times the body length. The image is very similar to the hammer.
Right after an upward trend, close to the resistance, a hanging man appears. In that session, prices open falling down, and keep dropping. However, prices can’t be afforded, returning to the initial levels. That means the sellers started acting, but just slightly, and buyers are still active. If the next session brings a bearish candle, the reversal can be confirmed, otherwise the hanging man is not valid.
The engulfing bearish works just like the bullish engulfing, but heading to a drop this time. In this pattern, a smaller candle with empty body is formed, in an upward trend. The next candle is larger, filled in and totally engulfing the first one.
It shows the buyers losing their domain. A white candle appears, signing hikes, on a common trading in an upward trend. However, the next day brings a huge downward candle, expliciting the sellers strength. The smaller is the first candle and the larger is the second one, the more reliable will be the pattern. As with all candles standards, it is advisable to wait for the next trading session. If a dowward candle is formed, the pattern can be confirmed.
It’s formed by a large and empty candle, indicating an upward, followed by a smaller and filled in candle that opens above the first candle’s top and covering at least 50% of its body.
The market keep increasing, and right after a session of strong hikes, a gap is formed. However, before the end of the sessions, a selling pressure is unveiled, and makes prices to close in a drop. The higher is the opening for the black candle and the much it penetrates the first candle, the more reliable the pattern will be. The confirm the dark cloud, a tradind session must open above the maximum (gap) from the previous day.
It has a long shadow on top, with no body. It appears within an upward trend, usually on the resistance, with an upward candle happening in the session before.
A doji candle indicates that opening and closing prices were the same. The graavestone doji remembers the shooting star, but brings a stronger selling pressure. Within an upward trend, prices start hiking, but the raise is not sustained, and prices fall back to the initial levels. The longer the top shadow is, the more reliable is the pattern, because the higher the shadow, the highest price reached, but the hike was not sustained.
Three Black Crows
This patterns comprises three large and filled in candles, creating a kind of ladder on graphs, indicating a dramatic drop on prices, and a strong reversal move.
That happens at the end of an upward trend, usually on the top. The first candle shows the buying stregth getting weaker, and the following candles indicate a gradual drop, which can be motivated by investors realizing their profits. The opening prices for the second and the third candles can happen in any level inside the previous candlestick, but they always close in a lower level. Investors should note that the opening prices are at or in the middle of the previous candle, and pay attention if the candle is very large, indicating that the market may be oversold.