A candlestick basically has three basic features:
- The body, which represents the open to close range
- Upper and Lower wick, which represent high and low
- Color, where green means a price increase and red means price decrease during the day
The interesting thing is that these candlesticks can form patterns due to the herd behavior of traders in the stock market. These patterns have a psychological factor to them and we will look at each and every candlestick pattern with the same psychological approach.
This is the simplest of all candlestick patterns. It is a single candlestick pattern where the candle has little or no wick. This pattern tells us that the market was one sided throughout the day.
In case of a green Marubozu candle, the traders started buying the moment market opened and stopped to buy only when the markets closed. Similarly, if there is a Red Marubozu candle, the whole day is interpreted to be a selling day.
Hammer and Inverted Hammer Patterns
This is also a single candlestick pattern and it is significant when it is found at the bottom of a downtrend. The traders tend to sell during the start of the day since the trend is downwards, but soon the demand pops up and the market reverses from the low of the day to close above the open of the day.
Similarly, inverted hammer pattern also appears in a downtrend, just that the upper wick is long and the lower wick is short. The psychology behind this patterns is that the traders started buying during the day showing a great demand. But, then because the markets were in a downtrend, the demand slowly fizzled out and the markets fell to close just above open. This indicates that the markets are getting ready to reverse.
This is generally a reversal signal and there is a high probability that markets will reverse once this pattern appears on the charts.
Hanging Man and Shooting Star
These patterns are exactly similar to the hammer patterns. The only difference being the pattern should appear when the prior trend is an uptrend as shown in the chart.
Bullish and Bearish Engulfing Pattern
The engulfing pattern is a multiple candlestick pattern in which the current candle completely engulfs the previous candle indicating a strong momentum in that direction. In the following chart, as you can see the green candle completely engulfs the previous red candle, indicating a strong demand and thus a reversal in prior downtrend
Similarly, when there is a prior uptrend and a red candlestick pattern engulfs the previous candle completely, it indicates that there is an increase in supply which is pushing the prices down.
Three White Soldiers and Three black crows
This is a multiple candlestick pattern where there are three consecutive candles with very small or no wick. When there are three consecutive green candles, that indicates a bullish momentum and the pattern is called Three White Soldiers and when there are three consecutive red candles, that indicates a bearish momentum and the pattern is called Three Black Crows. This generally is a continuation signal.