About stock market and financial, Study notes of Financial Statement Analysis

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INDEX :-

How to read candlestick charts? Hammer Pattern Bullish Engulfing The Morning Star Piercing Pattern White Marubozu Falling Window Rising Window Downside Tasuki Gap Upside Tasuki Gap Rising Three Methods Falling Three Methods Doji Bearish Counterattack Tweezer Top Shooting Star Bearish Harami Three Inside Down Black Marubozu

How to read candlestick charts?

Candlestick charts originated in Japan over 100 years ago when the West developed bar charts and point-and-figure charts. In the 1700s, a Japanese man known as Homma discovered that since there was a relationship between price and the supply and demand of rice, markets were also strongly influenced by traders' sentiments. A daily candlestick chart shows the open, high, low and close price of a security for the day. The wide or rectangular part of the candlestick is called the "real body" which represents the link between opening and closing prices. This real body shows the price range between the open and close of that day's trade. When the real body is filled, black or red, it means the close is lower than the open and is referred to as a bearish candle. This indicates that the price opened, the bears pushed the price down and closed below the opening price. If the real body is empty, white or green it means the close was higher than the open which is called a bullish candle. It shows that the price opened, the bulls pushed the price up and closed above the opening price. The thin vertical lines above and below the real body are known as wicks or shadows which represent the high and low prices of the trading session Upper shadow denotes higher prices and lower shadow denotes lower prices during the trading session.

Before we get into the different candlestick charts, there are a few assumptions that need to be kept in mind which are specific to candlestick charts. Strength is represented by a bullish or green candle and weakness by a bearish or red candle. One should make sure that whenever they are buying it is a green candle day and whenever they are selling make sure it is a red candle day. The textbook definition of a pattern lays out some criteria, but one should point out that there may be slight variations in the pattern depending on certain market conditions. One should look for a prior trend. If you are looking for a Bullish reversal pattern, the earlier trend should be bearish and if you are looking for a Bearish reversal pattern then the earlier one should be Bullish. Candlestick patterns can be divided into:

1. Continuity Pattern
2. Bullish Reversal Pattern
3. Bearish Reversal Pattern

Piercing Pattern :

A piercing pattern is a multiple candlestick chart pattern that forms after a downtrend that signals a bullish reversal. Two candles make it up, the first candle is a bearish candle which indicates the continuation of the downtrend. The second candle is a bullish candle that opens the gap but closes more than 50% of the actual body of the previous candle, indicating that the bulls are back in the market and a bullish reversal is about to take place. If a bullish candle is formed the next day, traders can enter a long position and place a stop-loss at the bottom of the second candle.

Bullish Engulfing :

Bullish engulfing is a multiple candlestick chart pattern that forms after a downtrend that signals a bullish reversal. It is formed by two candlesticks, the second candlestick surrounds the first candlestick. The first candle is a bearish candle which indicates the continuation of the downtrend. The second candle is a long bullish candle that completely engulfs the first candle and indicates that the bulls are back in the market. If a bullish candle is formed the next day, traders can enter a long position and place a stop-loss at the bottom of the second candle.

Three White Soldiers :

The Three White Soldiers is a multiple candlestick pattern formed after a downtrend that signals a bullish reversal. These candlestick charts are made up of three long bullish bodies that do not have long shadows and are open within the original body of the previous candle in the pattern.

Three inSide Up :

The Three Inside Up is a multiple candlestick pattern formed after a downtrend indicating a bullish reversal. It consists of three candlesticks, the first one is a long bearish candle, the second one is a short bullish candle that should be in the range of the first candlestick. The third candlestick should be a long bullish candlestick that confirms a bullish reversal. The first and second candlesticks should belong to the Bullish Harami candlestick pattern. Traders can take long positions after the completion of this candlestick pattern

Tweezer Bottom :

Tweezer Bottom Candlestick Pattern is a Bullish Reversal candlestick pattern that forms at the end of a downtrend. It consists of two candlesticks, one is Bearish and the other is Bullish candlestick. Both candlesticks make almost or the same low. When the Tweezer Bottom candlestick pattern is formed the prior trend is a downtrend. A bearish tweezer candlestick is formed that looks like a continuation of an ongoing downtrend. The next day, the low of the second day's bullish candle shows the support level. Bottom candles with almost identical lows indicate the strength of support and also indicate that the downtrend may reverse to form an uptrend. Due to this the bulls come into action and drive the price upwards. This bullish reversal is confirmed the day after the bullish candle is formed.

Inverted Hammer :

An inverted hammer is formed at the end of the downtrend and signals a bullish reversal. In this candle, the real body is located at the end and there is a long upper shadow. This is the inverse of the Hammer candlestick pattern. This pattern is formed when the opening and closing prices are close to each other and the upper shadow should be more than twice the actual body.

On-Neck Pattern :

The on neck pattern is followed by a downtrend when a long real bodied bearish candle is followed by a short real bodied bullish candle that gaps at the open but then closes near the close of the previous candle. The pattern is called a neckline because two closing prices are the same or nearly identical in two candles, forming a horizontal neckline.

Hanging man :

A hanging man is a single candlestick pattern that forms at the end of an uptrend and signals a bearish reversal. The actual body of this candle is smaller and is positioned on the top with the lower shadow that should be more than twice that of the actual body. There is no upper shadow or lower in this candlestick pattern. The psychology behind the formation of this candle is that the prices opened up and the sellers pushed the prices down. Suddenly buyers came into the market and pushed the prices up but failed to do so as the prices closed below the opening price. This resulted in the formation of a bearish pattern and indicates that the sellers have returned to the market and the uptrend may be over. If a bearish candle is formed the next day traders can enter a short position and place a stop-loss at the height of the hanging man.

Bearish Engulfing:

Bearish Engulfing is a multiple candlestick pattern formed after an uptrend that signals a bearish reversal. It is formed by two candlesticks, the second candlestick surrounds the first candlestick. The first candle being a bullish candle indicates the continuation of the uptrend. The second candlestick chart is a long bearish candle that completely engulfs the first candle and shows that the bears are back in the market. If a bearish candle is formed the next day traders can enter a short position and place a stop-loss at the high of the second candle.

The Evening Star :

An evening star is a multiple candlestick pattern formed after an uptrend indicating a bearish reversal. It is made up of 3 candlesticks, the first one is a Bullish candle, second one is Doji and third one is a Bearish candle. The first candle indicates the continuation of the uptrend, the second candle being a Doji indicates indecision in the market, and the third bearish candle indicating that the bears are back in the market and a reversal is about to occur. The second candle should be completely outside the actual bodies of the first and third candles. If a bearish candle is formed the next day, traders can enter a long position and place a stop-loss at the high of the second candle.