Types of candlesticks and their significance
Technical chart reading is a very powerful skill to have if you dream of becoming a trader and want to survive in this world of stock markets. We all know that chart reading is the most important aspect of technical analysis. So, we go on the internet searching for technical charts and I am sure you all must have come across one common chart, which is the “candlestick chart”. This is the most popular chart among all traders and investors. The reasons behind this are that this chart is easy to understand, gives high accuracy trades, allows us to know the trend of the market, tells us about the sentiments of buyers and sellers, and many more. This chart is definitely the best amongst all the other charts.
The candlestick chart consists of various candles, each of which has its own significance. Each candle on the chart shows the momentum that occurred at a particular time-frame. This “momentum” is nothing but the buying and selling happening in the market. Different candlesticks show different momentum and give us a signal by which we can plan our trades.
Let’s now understand the different types of candlesticks with their significance in detail:
A Marubozu candle represents extreme bullish or bearish pressure in the market. These candles only have a full body and no shadows or wicks. In the above picture, the green Marubozu represents the extreme strength of bullishness with buyers dominating the market as the candle opened at the low price and closed at the high price without forming any shadows or wicks. On the other hand, if you see the red Marubozu candle, it represents an extreme strength of bearishness with sellers dominating the market as the candle opened at the high price and closed at the low price. Generally, after these candles are formed on the chart, further momentum or trend continues in the same direction. After a bullish Marubozu is formed, bullish momentum might continue further. In the same way, if a bearish Marubozu is formed, then bearish momentum might continue further.
These are the types of candles you will frequently see on the charts. They are similar to Marubozu candles, but the only difference is that these candles have wicks or shadows. The long green candle in the above picture shows that there is strong bullish momentum and buyers are trying to dominate and we can see more upside direction in the market. Similarly, the long red candle shows that there is bearish momentum and bears are heavy on the bulls and trying to take the market downwards. These candles typically show the strength in the direction of the market and help us predict the future movement.
Hammer candles generally represent a trend reversal signal in the market. These candlesticks usually form at the bottom of a downtrend and show a reversal sign in the trend irrespective of the colour of the candle. These candles have very short bodies and long wicks, which shows that buyers are trying to dominate from the bottom and want to take the market upside. Usually, after the formation of these candles at the bottom, a strong upside momentum comes and we see an uptrend in the market.
Inverted hammer candles look completely opposite to hammer candles but have the same significance. These candles are also formed at the bottom of a downtrend and show a trend reversal sign in the market. These candles show that the market has fallen to a price where further selling might not continue because now buyers are accumulating at the bottom and a trend reversal can take place. Usually, after an inverted hammer is formed at the bottom, an upside momentum can take place and we can see an uptrend in the market.
“Shooting star”. The name itself tells us that it’s a candle which looks like a star falling from space. And as simple as it represents falling, that means it’s a candlestick which signals downside in the market. They look similar to inverted hammer candles but work completely opposite. These types of candlesticks are formed at the top of an uptrend and indicate a trend reversal and that the market might begin a downtrend. Irrespective of the colour of the candle, these are bullish reversal candles, and if you spot them at the top of an uptrend, you will get a good opportunity to trade a downtrend with very high accuracy. These candles, in most cases, provide a good risk-reward with fast momentum in our favor.
6. Neutral or standard doji:
Doji are the candles which are formed with almost no body and only have wicks or shadows. Their open and close prices are almost equal, or at a slight difference. These doji candles show indecisiveness in the market. They represent an equal fight between buyers and sellers, and nobody is able to take the market in any direction. These candles can form at the top or bottom of a trend and can even show a trend reversal. They can also form as a pause candle between a trend of strong bullish or bearish momentum, after which the trend might continue further.
Long-legged doji work similar to standard or neutral doji. The major difference is that these doji candles are formed with long wicks and shadows compared to standard doji candles. They show that the price is moving in a short range and gives a sign of indecisiveness in the market. Long-legged doji don’t usually have any specific spot to form on the chart; they can form at the bottom, top, or anywhere in between. If you see such candles in a strong bullish or bearish trend, it tells us that the trend may take a pause or take a reversal irrespective of the colour of the candle.
The name “Dragonfly doji” suggests that these candles occur in the shape of a dragonfly. These candles have a long lower wick/shadow and a very thin body that closes at the high or near to the high of the candle. These candles generally represent a strong trend reversal. They are mostly formed at the bottom of a downtrend and show a trend reversal sign. They also sometimes form in the middle of an uptrend and give a signal that the trend might continue further. The Dragonfly Doji is a high-accuracy trend reversal candlestick which can give very good results if traded properly.
Gravestone doji is completely opposite of dragonfly doji. These have long upper wicks or shadows and a very thin body, closing at the low or near to the low of the candle. These doji candles signal that bearishness might come in the market. They are usually formed at the top of an uptrend, which represents a trend reversal sign. If you spot a gravestone doji on the top of an uptrend, you can book your upside profits and wait for an opportunity to trade downside after the trend reversal. Gravestone doji is a high-accuracy candlestick and gives good downside momentum after it is formed. Trading such candlesticks will give you good risk to reward results in trading with strong momentum in your favor.
The spinning top doji is similar to a standard or neutral doji. The only difference is the size of the body. They have short upper and lower wicks/shadows with a very small body size, which opens and closes within a short price range. Spinning top doji signals indecisiveness in the market irrespective of their colour, and can even form to either reverse a trend or continue the ongoing trend. You can spot them at the top or bottom of a trend or even in the middle of any ongoing trend.
Candlesticks play a huge role in trading, and if we spot the right candlestick at the right time, we can make good money out of it. Even though candlesticks are one of the major parts of technical analysis, it is not just enough. Candlestick is just the basics and the first step towards learning technical charts. Technical analysis is a vast field which does not end here. It also includes candlestick patterns, trendlines, various structures, and different parameters, which will help us improve our accuracy even more and increase our winning percentage. No doubt, you can just trade by seeing a particular candlestick at the right spot and gaining good results, but having more and more knowledge will ease your trading journey and make you more confident.
So, these were some major candlesticks to look for on a chart to get the best possible results out of them. These candlesticks if you study on the chart and backtest the past data, you will understand what value they provide and how you can use them for your trading benefit.
I hope through this blog you gained some valuable knowledge which helped you move one step forward in your trading journey. Thank you!
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Originally published at https://tradersvault.blogspot.com on October 26, 2022.
