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Understanding Candlesticks

Did you know that a candlestick chart can help a retail trader predict upcoming market movements? Watch our engaging and easy-to-understand video from the #LearnWithUpstox series to learn more about candlestick charts, the correct way to interpret them, and their significance.

Welcome back to a new blog of ‘Learn with Upstox’. Amongst all market pattern analysis studies, the one tool that is the most efficient for retail traders is the Candlestick Pattern. As the name suggests, it looks like a candlestick.

To understand the Candlestick Pattern, the simple concept that we need to understand is OHLC. Simply put, O tells you where the market opens, H shows the High Point, L marks the lowest, and C is at the close. 

Now this is no secret that in the buyers’ market, the Bullish market pattern, the one that surges upward, is always shown in green colour, whereas in the sellers’ market, the Bearish short selling, falling market is displayed in a red coloured candle. 

The distance between the Open and the Close is called the body of the candle and the Intraday High and Low points, the extreme that the market touches is called the wick of the candle.

To understand this better, let’s study these 2 simple candlesticks. 

 

In the first candle, the colour green tells us that the market closed at the up. The red one however shows us that the market closed after falling from where it opened. 

  1.     Bearish Engulfing Pattern: 

 

Imagine, if a stock opens at Rs. 500, goes down till Rs. 490, then surges up until it touches Rs. 590, before closing at Rs. 580. This is always represented in red because it’s a Bearish pattern, when you see a big-bodied candle, where the BODY > WICK, it means that the market closed at a considerable distance from where it opened. Engulfing because its big body engulfs all the previous smaller candlestick patterns. 

 

  1.     Bullish Engulfing Pattern: 

It is similar looking to the Bearish Candlestick pattern, except it’s marked in green, the big-bodied candle when the BODY > WICK, it means there was considerable loss. Imagine if a stock opens at Rs. 500, rises till Rs. 510, falls down till Rs. 400, before closing at Rs. 410. You will see the Bullish Engulfing Pattern

 

  1.     Hammer Candlestick Pattern: 

The Hammer Candlestick Pattern is formed when the BODY < WICK. Say, if a stock opens at Rs. 500, over the course of the day, it keeps falling from 480 to 450, 420, 400 till 350. Now from here on, it bounces back until it breaks the 500 mark, keeps rising until it finally closes at Rs. 530. It is to note that the nature of Green Hammer patterns is extremely Bullish on Intraday Level. Hammers never stop at the Lows, they rise up, break the open and finish at a green Hammer Candlestick. 

 

  1.     Inverted Hammer Pattern 

The Inverted Hammer Candlestick Pattern is formed when the BODY < WICK. Say, if a stock opens at Rs. 500, it rises till Rs. 600, over the course of the day comes down to 530, then 510, breaks the open and closes at Rs. 450. This pattern displays extremely Bearish market behaviour. The pattern always bounces back downward. 

 

  1.     Doji Pattern

This market pattern closes at the open. When the market comes back from however high or low it was over the course of the day, and closes exactly where it opened at, it is represented by the Doji pattern. The Doji pattern signifies the stalemate between the Bulls and the Bears, the buyers and the sellers. However non functioning the pattern may be, it always calls for attention as it promises interesting prospects. 

 

  1.     Morning Star Pattern: 

Like the rising sun, if the market rises, it is best represented with a Morning Star Pattern. In the image, as we can see that the first candle, the red Bear pattern candle represents selling. Over the course of the day, the following candlestick happens to be a Doji candle, while the 3rd one is a Bullish Engulfing Candlestick. The Morning Star pattern helps you realise the present scenario of the market and is mostly a good news bearer. This pattern is efficient pattern to understand and enter long-term trades. 

 

  1.     Evening Star Pattern: 

Exactly opposite to the Morning Start Pattern, it represents a chain of events closing on a Bearish Engulfing Candle. This pattern is extremely useful and efficient to enter a short trade. 

We hope that the information shared will help simplify the simple concepts of BODY, WICK, the OHLC, the different patterns and their functionality in simplifying the complexities of the trade. 

With Upstox, keep learning, and keep trading.

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