How to read candlestick charts for day trading? This question arises in every active traders mind. Whether you are a day trader (intraday), swing trader, positional trader, a scalper, do event based trading or any other form like ( btst, stbt, arbitrage), without understanding the candlestick charts and its patterns, there is no way you can succeed in stock market.
Candlesticks tend to form patterns which are interpreted by traders and investors, to identify a continuation or reversal of the existing trend in a stock or indices (e.g. nifty, BankNifty).
Yes, there are other forms of chart like, line chart, bar chart, renko chart, p&f chart, but Japanese candlestick charts stand at first in the queue. Reason being, it’s not only trustworthy, but it gives you lot of information related to price movement.
The kind of patterns it develops, will provide you enough information to make future predictions regarding you trades.
Also, the kind of attention Japanese candlestick charts have received, there is no comparison to other chart types. It is easy to understand & interpret at the same time, with great accuracy.
This is a best guide for beginners as well as experienced traders and for all who love technical analysis. Here, we will not only going to understand how to read candlesticks charts, rather how to implement while doing day trading, plus short term investing.
Note: This guide will be long, as covering all aspects, please do read it with patience. This will benefit and clear all you doubts and confusion.
Moreover, this will help in improving your trading ability and enhancing your performance by giving enough confidence to trade in live market.
After reading this you can compare your past performances, or if you are a beginner than its best to understand this before making any trades in stock market.
Instead of using more complex terms & technical jargon’s, I have tried to keep this as simple as possible.
So without further delay, lets go straight to get the basic understanding of candlestick charts.
How many types of chart are there in stock market?
In, technical analysis there is a famous quotes “History repeat itself”, from a analyst perspective, charts which are graphical representation of all the data in a single line, bar or candles, gives enough information to make future predictions possible.
One can visualize the ongoing trend of a particular stock or any index, helping to build new positions in market.
There are majorly five types of charts:
- Line chart
- Bar charts
- candlestick charts
- Renko charts
- Point&figure charts
There are other few more chart types, but out of these candlestick charts are the one used by majority of traders in trading community.
Below image shows how line chart looks. Line chart uses only one data point i.e. closing price of the stock, you can see the overall trend but, it will not help you in knowing additional information and that is why it is used rarely.
Bar charts are little more advanced as it uses four data points OHLC(open, high, low, close) of a stock. However, bar charts lack the visual appearance as it does become tough if you are using multiple chart trying to analyze the market. Look at the below bar chart, color of bars can vary depending upon the platform you are using for charting.
Bars charts does not create any patterns that one can use strategically for trading or investing. We will not waste our time to understand something, which we will not going to use.
Same with the case of renko and P&F charts. Hence its better to focus and give time to understand candlestick charts and its patterns & how to take benefit of them during trading and investing in stock market.
History of candlesticks charts:
Candlestick charts have a long history dated back to 18th century, it is assumed to have been developed by a Japanese rice trader named, Munehisa Homma.
Homma is regarded as the Grandfather of candlesticks because of his research on price pattern recognition. Homma is credited with giving rise to a research technique which became the basis for trading in Japan.
However, it was not known to the world till 1980’s when Steve Nison, through his book, Japanese Candlestick Charting Techniques introduced this to the western world.
As a traders we should be thankful to Homma as well as Steve to bring this to our attention. Most of the name and patterns on candlestick charts are from Japanese orientation, to keep the originality as it is.
Candlestick charts use the same price data as bar charts (open, high, low, close). However, candlestick charts are drawn in a much more visually identifiable way typically resembling a candle with wicks or shadows on both ends. The high and low are described as shadows and plotted as a single line.
Learning how to read candlestick charts are easy, but requires little patience
How To Read Candlestick?
Candles can be categorized as a bullish(green) or bearish(red) candle usually. The colors can be customized to any color of your choice depending upon the technical analysis software you use.
To read candlesticks one has to pay a closer attention to the overall body of the candle.
Above image tells us the same. There are three parts in a single candle, let us try to understand bullish(green) candle first.
- The main body or real body, rectangular in shape it connects the opening and closing price
- Upper shadow link the high point to the close
- Lower Shadow joins the low point to the open
Let us see now the bearish(red)candle:
- The main body or real body, rectangular in shape it connects the opening and closing price. However, bearish candles is opposite to bullish candles, the opening is at the top end and the closing is at the bottom end of the rectangle.
- Upper shadow link the high point to the open
- Lower Shadow joins the low point to the close
I don’t think, I need to explain what is open, high, low, close? they are self explanatory if you see the candle. However for reference this what OHLC means:
Open – When the markets open for trading, the first price at which a trade gets execute is called the opening price.
High – This tells us the highest price at which the market participants (traders or investor) are willing to transact for the given day.
Low – This shows the lowest level at which the market participants (traders or investor) are OK to transact for the given day.
Close – Closing price is the most important price, as it is the final price at which the market closed for a particular period of time.
Closing price also useful as an indicator for the intraday strength. If the close is higher than the open, then it is considered a positive day(bullish) otherwise negative(bearish).
If you have the OHLC data with you, now you can easily plot both the candlesticks (bullish and bearish). However, you do not need to do this manually, the software does it for you.
You just need to take a look at the various points to understand its opening, closing, high, low value.
Range of the candle:
The length of the candle (upper shadow to lower shadow) denotes the range, it moves depending upon the time frames you have chosen (1min, 5min, 30min, day, week, month etc.) for candlestick charts. It gets calculated by subtracting the high from the low of the candlestick.
Range = High – Low
Range also indicates the volatility, higher the range more is the volatility and vice versa. Another key point is of short candles, it can be considered that the trading action was gloomy for the day without much movement.
You can consider the shadows as tests of a price range. whereas, Candles with no shadow indicate a strong trend in one direction.
So, just to sum up these are things you need to look seeing a candlestick:
Price:
Opening price / Closing price/ stock price went up or down
Shadows/wicks:
The lower shadow shows Lowest level for the time frame / The upper shadow shows highest level for the time frame
Bearish(red) candle:
A red candlestick shows the open price at the top of the body / A red candlestick shows closing price at the bottom of the body.
Bullish (green) candle:
A green candlestick shows the open price at the bottom of the body / A green candlestick shows the closing price at the top of the body
Below charts depicts, how does a candlestick chart look like when combine with data point on a software analysis tool.
Now, that you know the basics of how to read a candlestick, we will going to learn different pattern formations and how to use them while trading or investing in stock market.
See, candlesticks are just like watching a fight between bulls and bears, only time tells who is really going to win the fight.
How many types of candlestick chart patterns are there?
You can classify the candlestick patterns in to two major categories:
- Single candlestick pattern
- Multiple candlestick patterns
A single candlestick pattern is formed by just one candle. Under single candlestick pattern there are many other patterns, but will study the most important one, they are:
- Marubozu
- Bullish Marubozu
- Bearish Marubozu
- Paper umbrella
- Hammer
- Hanging man
- Spinning Tops
- Doji
- Shooting star
- Inverted Hammer
While under multiple candlestick patterns are formed by two or more candles. Some of the best candlestick patterns are:
- Engulfing Pattern (a)Bullish Engulfing Pattern (b)Bearish Engulfing Pattern
- Piercing Pattern
- Dark Cloud Cover
- Harami Pattern (a) Bullish Harami (b) Bearish Harami
- Morning Star
- Evening Star
- Three White Soldiers
- Three Black Crows
Before we begin to understand these candles, you need to be aware of long/short candles, a similar pattern can exist with small bullish(green) or bearish(red) .
The only difference is, the short candle reflects lesser activity(buying or selling), on the other hand longer candle reflects high buying and selling.
Avoid taking any positions when you see the range or length of the candle is small. Below image tells you the same.
So, lets begin to understand first the best major single candlestick patterns.
What Is Marubozu Candlestick?
Marubozu is a Japanese word, in English translate to “bald head” or “shaved head”. Look at the image below to understand better.
Marubozu does not have any upper or lower shadows(wicks). It only have the central bod(real body). You can easily identify this on candlestick charts. There are two types of Marubozu candles:
- Bullish marubozu(green) candle
- Bearish marubozu(red) candle
As shown in image above green color is bullish and red one is bearish marubozu candles. Before we go further, there are few things you need to keep in mind while using candlestick patterns.
- Always look for the prior trend whether stock or index, when i say prior trend it means, was the stock going up rallying or was it going down, declining.
- Try to buy strength and sell in weakness, what i mean is buying something that is moving up and selling weakness means selling something that is moving down.
- You have to be little resilient or flexible with patterns, use other technical tools, check stock or index support and resistance as well.
What Is Bullish marubozu (green) candlestick pattern?
As, we know now bullish marubozu does not have upper or lower shadows, reason being it’s high=close, open=low, when this happens bullish marubozu gets formed.
But, this is not always true, you have to give a room of error, it can’t be that perfect, as said need to keep little flexibility with candlestick patterns.
It may have a little shadow above or below the candle. Having said that, this pattern can occur in between any trend, there is no prior fixed bullish or bearish trend needed.
A bullish marubozu indicates surge in buying from market participants, they want to buy as every price point.
If it occurs during a price fall, than it may mean that sentiments have changed, and the trend may get change. Let us see how does bullish marubozu appears on a chart.
Take a look at the day chart (ICICI BANK Ltd.), prior to appearance of bullish marubozu the trend was negative, the stock was falling, but there was sudden surge, people started buying the so much so that the rally took place around Rs.386 and it went up to Rs.526, not only as a trader this was the great bet but as as investor it would have been miracle.
If you do not believe in taking more risk, you as a intraday trader could have closed the position same day. Otherwise can carryover to next day as well. The price opened gapped up next day.
Let us see another chart forming bullish marubozu:
This time the bullish marubozu candle appears in between the trend, there are continuous marubozu candle. One would have easily made lot of money if traded this candles.
Another important point before taking the position is putting the stop loss, you can put the stop-loss either to the low of the marubozu candle or previous candle high.
In above case a stop-loss could have been the smaller candle high, just below the first marubozu candle.
What Is Bearish marubozu (red) candlestick pattern?
Bearish marubozu candlestick patterns appears on chart when Open = High, and Close = Low. Similar to bullish this can appear anytime on chart, which may lead to significant change in upcoming direction or trend of the stock.
The upper or lower shadows can vary a little bit.
Bearish marubozu occurs due to high selling pressure from the participants. One can short the positions while seeing this kind of pattern appearing. let us see few example for bearish marubozu candle.
Above is 30 minutes ICICI BANK Ltd. of may,2020. This a unique chart as you can see, both the candles here, when the bullish marubozu appear, there was quick rally, keep in mind its 30 minutes charts not day, so the thing have happened within that time frame.
Now as a intraday trader this was the best opportunity to have some quick bucks. Similarly the red candle which is bearish marubozu shows, one could have easily short and earned some handsome money, that too on the same day. As said keeping the stop-loss is very vital, I have already informed where to keep the stop-losses.
It might happen your stop-loss get hits and you lose some money, but trading or investing is not one day game, you have to keep your risk to reward ratio.
For earning 1 rupee, how much you are ready to lose is what risk to reward. This is all going to happen but you need to try and stick to some strategies.
Once you understand and know how to read the candlestick charts and patterns, there will be rise in your confidence when you take any position in market.
How to Read Paper Umbrella candlestick pattern?
Paper umbrella is a single directional candlestick pattern. It tells you the reversal in direction of the trade. As you can see in the image above, you can identify this candle by simply looking at the wick or shadow which is long or say 1/3rd of the real body. it’s a trend reversal pattern, which informs you about the change in the trend that is suppose to happen.
You have to look the prior trend while using this pattern. However, the color of the candles does not matter, what matter is where it appears. If it appear after a downward rally, there can be trend reversal and bulls can take charge of the situation.
Whereas, in case of uptrend rally, the bears can make the trend in reverse direction. Basically, there are two types of paper umbrella:
- Hammer
- Hanging man
Let us discuss them one by one.
How To Read Hammer candlestick pattern?
Hammer appears usually at the end of the downward rally. Hammer shows the bears are losing the control over the stock and anytime soon a fresh trend can begin.
Which means buyers can make position, but remember not to hurry you can wait for the candle to get completed for better confirmation. Hammer patterns are bullish in nature suggesting uptrend.
The body of the candle is small with long shadow at the bottom. The color of the candle, if green is better than the red color.
Green color hammer candle shows the strong the buying is happening at those levels. Also, the minor variation in candle is acceptable, remember the flexibility with patterns.
It may have a little upper shadow, but that’s OK, until the lower shadow is long. Longer the lower shadow, more chances of trend getting reversed. Let us see how does it look on chart below:
As, you can see in the chart(30 min) above, there are two hammer candlestick patterns visible. As an intraday trader one could have easily placed the stop-loss near the first hammer candle low. If would have taken the trade within the day, have earned quite effortlessly.
As, said if the pattern is in green color, than it shows the strong buying sentiments. Also, keep in mind the prior trend, as it should be bottom of the downward rally.
How To Read Hanging man candlestick pattern?
Opposite to hammer, hanging man appear at the top of the rally or during the upward trend. When the buyers are losing the grip in market, and a trend is about to change. Hanging man candlestick can be of any color, however if it is red, it means strong selling position been made at those levels.
Moreover, hanging man is a bearish candlestick pattern, which tells one should go for shorting when seeing it. Other parameter are same as of hammer. let us see how does it look on charts.
As, clearly visible in the chart(30min) above, after a rally, 3 hanging man candlestick patterns appears on chart, telling a new trend is about to come.
However, the first two candles are green in color, as said until the red hanging man candle appears the bears do not have full control. Red color candle shows the selling pressure is becoming high and the bears are in charge of the situation now.
One thing need to keep in mind is putting the stop-loss and it should be done only after the confirmation from the following candle. A great trade opportunity for day traders. As an investor one can use the same method only the time frame of the charts gets changed.
Throughout this guide, I have tried to use as simple language as possible, because for beginners understanding such things can be really complicated.
How to Read Spinning Tops candlestick pattern?
A spinning top candlestick pattern convey about the indecision, uncertainty or confusion with the ongoing trend. As you can see, the candles has small real body with long upper & lower shadows established equally. Which means, the open price and close price are quite close to each other.
This happens when the open could be around 180 and the close could be 183 (green candle). Or the open could be 230 and close at 227 (red candle). These type of candlestick appears when both bulls and bears are trying hard, to make the trend in their direction but none succeed.
The color of the candles does not matter, having said that, it also depends where the candles are appearing.
If it appear during a uptrend with red color, than bears are trying to make a entry and drag the trend in their direction, another point could be the bulls are consolidating their positions, it means they might be selling few shares as the prices are up.
Whereas, if a spinning top candles appears during a downward rally green in color, the bulls are making an entry and try to change the trend direction.
However, whether the trend will get change depends upon, how long they fight, you can get a confirmation candle after few spinning top telling you about the situation and trend direction.
As, i said the color of the candles not matter much, but red spinning tops candle during an uptrend, shows strong sign of bull entry in rally and vice versa.
Now, the point is what to do, when such candlestick appears on chart. Depending upon your risk taking ability either you can wait till there is clear direction as to which way the trend will go next or you can make positions, but with half quantity.
So, suppose you wanted to buy 300 quantity, instead go with 150, also not to forget to put a stop loss. This way you will be in the market, and if the trend goes in to your direction you can benefit.
But, if the trend goes in other direction, than the losses would be less compare to the whole quantity.
Spinning tops are not directional candles, they won’t tell you about the direction clearly like marubozu, but they will alert you, about the forthcoming changes in the trend.
One can get ready for both the situation happening. Let us see how does it look on chart and what follows next after it appears.
Above is (1hour) chart of AXIS BANK Ltd. After an uptrend rally, appearance of spinning tops (red) candle, created a indirection about the next trend, bulls consolidate their position and bears entered the market with swag.
The price started falling sharply, as a day trader one could have, short the position at the top and booked profit within hours same day.
The next day price open with the gap down, if you were an short term trader, could have done STBT(sell today buy tomorrow).
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Let us see another chart this time a day chart.
After a downward rally, appearance of green spinning top with combination of a hammer candlestick. Mind it this a day chart from Rs.500 to Rs.550 within 2 days, one could have made it position and have earned quite significantly. Always look for combination of candlestick if possible to make your prediction more stronger.
What Is Doji candlestick pattern?
Doji candlestick patterns reflects the same sentiment as of spinning tops, the indicate the confusion, indecision in the market.
The body of the candles is very small with little or big shadows, sometime there will be no real body at all. Whenever you see doji candle appearing on chart be alert that a trend can end or it may continue.
The appearance of doji usually happens with combination of spinning tops. The color of the candles does not matter but, green is sign of reversal in case of downtrend rally.
Where as red shows the bears trying to drag a upward rally and the same rules apply that we have studied of spinning tops.
Let us see how they look on chart :
In the above (30min) chart , you can see lot of doji and spinning tops appearing at various places.
As, you can see there is no clear sign, what will be the next trend, one need to see this with combination of candlestick pattern for a clear picture. The market can swing in any direction, so place your trades with half risk.
Moreover, after a continuous rally few doji candle makes a appearance, showing a pause in rally and bears trying to break the trend. It resulted in end of a upward rally.
It can happen that even after the bear trying to change the trend they might failed. It’s better to look for other single candlestick pattern appearing nearby doji.
To be on the safer side during spinning top and doji check with any other signal from bullish or bearish candlestick patterns.
What Is Shooting star candlestick Pattern?
Shooting star is a bearish reversal pattern, usually occurring at the top of the uptrend. You can identify this pattern by looking at the top of the candle, its long upper shadow, with small real body at the end, with no or little lower shadow. The body of candles ideally should be 1/3 of the entire candle.
The color of the candle can be any green or red. However as it is a reversal pattern and the prior trend is an uptrend, always see if there’s a red candle appearing.
Moreover, if you can compare this with paper umbrella, we have learned above, the body is down with upper shadow, whereas paper umbrella has body at top and with long shadow downwards, so do not get confused.
As said shooting star candlestick pattern will always appear after a bull rally, telling that bears have made a strong entry at those price, bears are ready to drag the rally down, so you need to be careful.
As a buyer you can close your position and book profit or you can enter in a fresh trade by shorting at those levels. Please do not forget to put the stop-loss, it should kept higher than the shooting star candle high.
Let us see some charts to understand how does it look:
Its is Nifty(1hour) chart, shooting star candlestick appears at the top of the uptrend, signaling the buyers have been exhausted, and bears have made a entry to drag nifty index.
Within few hours you can see how the whole trend is reversed and the index is getting beaten down at every passing hour.
As, the color of the candle does not matter, however the shape does.
You can also observe, spinning tops and doji’s pattern telling the bull are trying but their handwork is futile. One could have entered the trade after the confirmation as the next candle after shooting start is pure red candle opening down gap.
Last but not the least, in single candlestick pattern we will study about the inverted hammer, they are just opposite of shooting star.
What Is Inverted Hammer Candlestick Pattern?
Inverted Hammer is a bullish reversal candle pattern that is found after the downtrend. Similar to shooting start, if you look , the body is small at the bottom, with a longer shadow at the top& little lower shadow. the longer the upper shadow, the more buying has happened.
The color of the candle can be any green or red. However as it is a reversal pattern and the prior trend is an downtrend, it is advisable to look for green, showing buyers have made an entry after long bearishness.
Let us see how does it look on chart:
Above is nifty day chart, as you can see the appearance of inverted hammer, stopped the downtrend and reversal happen. Do not underestimate as its a day chart, within few session one could have earned as nifty was at 10130 and moved till 10436 , within 3 sessions, its a quick trade for short term traders.
Moreover , you see, few other candles like doji, with paper umbrella, giving you enough information as trend is about to get reversed.
Conclusion:
So, this is how to read candlestick charts & its patterns & I hope all the single candlestick pattern we have learned till now, will have a significant impact on your trading style and psychology.
You can set up a trade by being more clear as to when to enter and to exit. Also, you need to keep a stop-loss in case the patterns does not support your direction.
But it can happen with anyone, you have to choose either to go with a strategy or do not go with any, always use other tools and indicator to be better positioned in market.
You can study about the best multiple candlestick patterns here. It is advisable to read them, before you trade. They will let you know how to identify the trend with 2 or more candlestick on chart.
Apart from these as a new trader or investor you should be aware of support and resistance for intraday trading as well as the best moving averages to use for day trading.
In case you want to know how much you need to save every month to reach your financial goals check out Moneycontain Monthly SIP Calculator with inflation here.
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Note: Please do not take this as any recommendation, to trade or invest. This is just for reference, to make you understand more about the candlestick patterns and its importance, under no circumstances intended to be used or considered as financial or investment advice, a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset.
Please do your own research and make investment. Moneycontain will not be responsible for any of your losses at all. The point made is for educational purpose only. All investments are subject to risks, which should be considered prior to making any investments.
