By Ee Hsin Kok. Edited by Arjun Chandrasekar.
Overview
Candlesticks are a powerful tool used to track the price movements of a stock. In a previous article, we covered the basics of how to read candlestick charts. Now, we will cover some basic candlestick patterns so you can put that knowledge to use.
The Pinbar
A pin bar candlestick pattern is defined by the shape of a candlestick. The candlestick should come with a small body, a small nose, and a large wick. It can be described to look like a hammer. Importantly, the color of the candlestick is unimportant, ONLY the shape.
Bullish pin bar examples:
We can tell these are bullish pin bars because the body (between the open and close prices) is small, the wick (the lower shadow) is long, and the nose (the upper shadow) is small as well.
Bearish pin bar examples:
We can tell these are bearish pin bars because the body (between the open and close prices) is small, the wick (the upper shadow) is long, and the nose (the lower shadow) is small as well.
Engulfing
An engulfing pattern happens when a candle’s body engulfs the previous day’s body. In other words, a bullish engulfing happens when a candlestick opens lower than the previous day’s close but closes higher than the previous day’s high. And the reverse is applicable for a bearish engulfing.
Bullish engulfing example:
The candle on the right opens lower than the previous candle’s close but closes higher than the previous candle’s open. You can visually see the white candle’s body engulf the red candle’s body.
Bearish engulfing example:
The candle on the right opens higher than the previous candle’s close but closes lower than the previous candle’s open. You can visually see the red candle’s body engulf the white candle’s body.
Morning and Evening Star
The morning and evening star candlestick patterns are used to signal reverses in trend. For the case of a morning star pattern (which is bullish), it usually comes with a tall red candle, followed by a smaller red or green candle, and then a tall green candle. The reverse is applicable for the evening star pattern.
Morning Star Example:
In this morning star example, there is a tall red candle, followed by a relatively small green candle, and then a tall green candle.
Evening Star Example:
In this evening star example, there is a tall green candle, followed by a small candle, and then a gap down to a tall red candle.
Conclusion
In this article, you learned 3 basic candlestick patterns that are a great way to make judgments on price movements. Though it is important to note that while candlesticks are a great tool to observe price movements, they should never be used alone. Candlesticks are just 1 factor in technical analysis, and using them without additional indicators is not advisable. However, when used in conjunction with support levels, volume, or momentum indicators, they can be a very powerful tool.
