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17 Jan - 2019

Best Candlestick Patterns Traders Must Know

The Candlestick chart is plotted with a data set that contains Open, Close, High and Low values for each time period you want to plot. The hollow/solid portion is called the Body. The lines above and below the Body are called Upper and Lower Shadow respectively. The Highest Trading Price is marked by the top of the Upper Shadow and the Lowest trading Price is marked by the bottom of the Lower Shadow. During selling pressure (Bearish tendencies), the Opening Price is more than the Closing Price and you get a solid body. Conversely, during buying pressure (Bullish tendencies), the Closing Price is more than the Opening Price and you get a hollow body.

● Black Body - Bearish candle | ● White Body - Bullish candle

How to analysis market trend:


1. The Hammer or The Inverted Hammer:

The Hammer is a bullish reversal pattern, which signals that a commodity is nearing bottom in a downtrend. The body of the candle is short with a longer lower shadow which is a sign of sellers driving prices lower during the trading session, only to be followed by strong buying pressure to end the session on a higher close. Before we jump in on the bullish reversal action, however, we must confirm the upward trend by watching it closely for the next few days. The reversal must also be validated through the rise in the trading volume

The Inverted Hammer also forms in a downtrend and represents a likely trend reversal or support. It’s identical to the Hammer except for the longer upper shadow, which indicates buying pressure after the opening price, followed by considerable selling pressure, which however wasn’t enough to bring the price down below its opening value. Again, bullish confirmation is required and it can come in the form of a long hollow candlestick or a gap up, accompanied by a heavy trading volume.

2. The Three White Soldiers

This pattern is usually observed after a period of downtrend or in price consolidation. It consists of three long white candles that close progressively higher on each subsequent trading day. Each candle opens higher than the previous open and closes near the high of the day, showing a steady advance of buying pressure. Investors should exercise caution when white candles appear to be too long as that may attract short sellers and push the price of the commodity further down.

3. The Morning Star

As the name indicates, the Morning Star is a sign of hope and a new beginning in a gloomy downtrend. The pattern consists of three candles: one short-bodied candle (called a doji or a spinning top) between a preceding long black candle and a succeeding long white one. The color of the real body of the short candle can be either white or black, and there is no overlap between its body and that of the black candle before. It shows that the selling pressure that was there the day before is now subsiding. The third white candle overlaps with the body of the black candle and shows a renewed buyer pressure and a start of a bullish reversal, especially if confirmed by the higher volume

4. The Piercing Line

The Piercing Line is a two-candle bullish reversal pattern, also occurring in downtrends. The first long black candle is followed by a white candle that opens lower than the previous close. Soon thereafter, the buying pressure pushes the price up halfway or more (preferably two-thirds of the way) into the real body of the black candle.

5.The Bullish Engulfing

The Bullish Engulfing pattern is a two-candle reversal pattern. The second candle completely ‘engulfs’ the real body of the first one, without regard to the length of the tail shadows. The Bullish Engulfing pattern appears in a downtrend and is a combination of one dark candle followed by a larger hollow candle. On the second day of the pattern, price opens lower than the previous low, yet buying pressure pushes the price up to a higher level than the previous high, culminating in an obvious win for the buyers. It is advisable to enter a long position when the price moves higher than the high of the second engulfing candle—in other words when the downtrend reversal is confirmed.

Lots of example from our MCX commodity market:

1. Crude oil chart: This below figure shows Hammer type candle formation.

2. Crude oil chart: This below figure shows Three White soldiers type candle formation:

3. Copper chart: This below figure shows Morning Star type candle formation

4. Crude oil chart: This below figure shows Piercing Line type candle formation

5.Crude oil chart: This below figure shows Bullish Engulfing type candle formation

How to analysis market trend:


Head and Shoulders Top:

A HS top is formed when the price makes a high, pulls back, makes a higher high, pulls back, and then makes a lower swing high. This creates three peaks, with the one in the middle being the highest. The topping pattern is typically only relevant if seen after a substantial advance.

Connect the two lows within the pattern with a trend line. This is the "neckline." If the neckline is angled up, traders will often enter short positions, or sell long positions, when the price falls below the trend line after the third peak. If the neckline is flat or angled down, traders will enter short positions, or sell long positions, when the price falls below the latest pullback low. When the price falls below the neckline, or latest pullback low, it is called a breakout. The breakout indicates the pattern has completed and the price will likely proceed lower.

If entering a short trade at the breakout level, a stop loss is placed above the high of the right shoulder.

Once a pattern completes the price will frequently, but not always, move back to, or above, the breakout point. This occurs in the chart above, where the price drops below the neckline but then rallies back above it a few later before continuing its downward course. It's for this reason a stop loss is placed above the right shoulder on short positions, as this helps reduce the possibility of being stopped by these small price moves against the trade direction.

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