When you learn a new language, what do you start with? The words, right. Because you can not make a new sentence without words. The same is the case for stock market trading. When you want to read candlestick charts, you need to learn candlestick patterns. A series of candlestick patterns form a candlestick chart. So, before anything about the candlestick patterns, you much know the basics of candlestick patterns.
A candlestick pattern has four data points: open, low, high, and low.
For a bullish candle, open is always below the close and for the bearish candle, open is always high the close. A body is formed between open and close. For bullish candlestick, shadow between high and close is called upper wick and the shadow between open and low is called lower wick. For bearish candlestick, shadow between high and open is called upper wick and the shadow between close and low is called lower wick.
There are thousands of candlesticks patterns. Then how to recognize bullish/ bearish candlestick pattern easily. Look at the scenario given below.
When the price closes near the high, then buyers are in control. When the price closes near the low, then sellers are in control.
We basically have three different market situations: uptrend, downtrend and sideways. When candlestick pattern is making higher highs and higher low, then the stock/ index is called uptrend. When candlestick pattern is making lower highs and lower lows, then the stock/ index is called downtrend. When the swing high and low are of same height, then the stock/ index is in sideways trend.
Now we will learn how to identify strengths and weaknesses in the market. So that you will not get caught in the wrong direction of the trade.
Here, we divide the move into two parts: trending move, and the retracement move.
Trending move: A trending move is the “stronger” leg of the trend. You’ll notice larger-bodied candles that move in the direction of the trend.
Retracement move: A retracement move is the “weaker” leg of the trend. You’ll notice small-bodied candles that move against the trend.
You might be thinking that why we need to learn trending and retracement move. As the trend is healthy, there will be a large trending move followed by small candle retracement move. When the trend is weak, there is no longer small candlestick in retracement move, but there will be large candles started to build up in that move. This tells you that the trend may be going to reverse.