5 Most Powerful Candlestick Patterns in Technical Analysis of Stock

Most Powerful Candlestick Patterns in Technical Analysis of StockMost Powerful Candlestick Patterns in Technical Analysis of Stock


Technical analysis says Reliance Industries and HPCL are good for buying, however it says Suzlon and Narayana Hrudalaya are in bearish mode.  It has always been an interesting point for serious traders to know the future trend of any stock so as to analyse the stock and take investment decisions. There are two main methods of analyzing a stock, fundamental analysis and technical analysis. While fundamental analysis is finding the intrinsic value of stock, technical analysis focuses on trends of the stock. One of the parameter in technical analysis is candlestick patterns which gives powerful patterns in analyzing a stock. What is Candlestick Pattern means? Which are the most powerful Candlestick Patterns in Technical Analysis of a Stock which every traded should know? Can you blindly believe technical analysis and buy or sell the stocks?

Also Read: Fundamental Vs Technical Analysis of a stock – How should you use it effectively?

What is the Technical Analysis of a Stock?


Technical analysis of stock and trends has been used by serious traders for ages. It is the academic study of historical patterns and trends of traded stocks. It considers the use of tools like bar or candlestick charts and trading volumes to determine the future behavior of stock. Although it is not 100% accurate and does not guarantee success, but, it remains one of the key methods of analyzing stock prizes along with fundamental analysis.

What are Candlestick patterns?


Candlestick patterns indicate the movement of prices of a particular stock graphically for a specific period of time. In other words, it is the graphical representation of price movements for a given period of time. They exhibit the opening price, closing price, high and low prices of a financial instrument. Candlestick patterns are very popular among traders as each if its bar contains much more information than the conventional line charts or bar chart.

If the opening price of a stock is above the closing price, then a filled candlestick is drawn. It the closing price is above the opening price, and then a hollow candlestick is drawn. This hollow or filled portion of the candle is known as the body or real body. The lines above and below are known as shadow, tail or wick and it represents the high and low price range within a specified period of time.  There are many patterns in the candle sticks that have gained popularity among traders due to their simplicity and accuracy.

5 Most Powerful Candlestick Patterns in Technical Analysis of Stock


Here are the most powerful candlestick patterns which would be helpful in doing technical analysis of a stock and derive BUY or SELL signal.

1) Doji Candlestick Pattern


These are the easiest identifying candlestick pattern as their opening and closing price are close to each other. The candle thus looks like a plus sign with a chance that high and low wicks of the candle being of different lengths. These are neutral patterns. However, they gain significance if they appear after a period of steady buying or selling. By itself, a doji signals an end of the previous move.

As the open and close are near the same level, it signifies the end of buying in an uptrend and an end of selling in a downtrend. This does not necessarily mean that there will be a V shaped move on the either side, but brakes have been put to the previous trend. A doji occurring in a range bound movement has little significance.

e.g. HPCL has formed Doji Candlestick on 20th November, 2017. Means it has broken the previous low and is now ready for upward trend.

HPCL - Doji Pattern- Candlestick Patterns

Also Read: Best Sector Mutual Funds to invest now

2) Engulfing Candlestick Pattern


It consists of two candle pattern. It occurs when second or latest candle overshadows the previous candle completely. Symbolically it means that the buyers have overpowered the sellers or vice versa. There is two type of engulfing patterns-  

a) Bullish Engulfing Candlestick Pattern


It is a bullish indicator suggesting a possible up move. In this case, the second candle’s body completely engulfs the previous day’s candle. Both the wicks of the candle of the first bar is covered by the second candle.

The pattern suggests that the bulls have taken over from the bears and are likely to start an up move. Such patterns are powerful if they are formed at the bottom of the correction in a bull move or near the bottom of a bear move. Such patterns are also seen at the end of consolidation.

e.g. Reliance stock has formed Bullish Engulfing Candlestick and ready for upwards movement on 20th November, 2017.

Reliance - Bullish Engulfing Candlestick Pattern-min

b) Bearish Engulfing Candlestick Pattern


The opposite of a bullish engulfing candle, a bearish engulfing candle pattern occurs near the top of an up move or at the top of a correction move in an overall bear market. The pattern indicates that the bears have won the fight against the bulls and can push the stock downward.

e.g. Suzlon has formed bearish Engulfing Candlestick patter on 20th November, 2017 and ready to move downwards.

Suzlon - Bearish Engulfing Candlestick Pattern-min

3) & 4) Morning star/evening star Candlestick Pattern


The morning star is a bearish three candle pattern which is formed at the bottom of a down move. The first candle in the morning star formation is a big bearish candle which clearly defines the down move. The second candle is a small candle which is ideally a doji candle. The third candle is a large bullish candle which closes near the top of the day.

Evening star occurs near the top of a rally and is a three candle formation. The first candle is a long bullish candle which is followed by a small candle which ideally should be a Doji candle. The third candle is a long bearish candle which signals the end of the bull move.

e.g. Narayana Hrudalaya stock has formed evening star candlestick pattern on 20th November, 2017. Means it is the end of the bull move.

Narayana Hrudayalaya-evening star candlestick pattern-min

5) Hanging man Candlestick Pattern


This candle is formed at the end of an end move. The rally is near its exhaustion which leads to a sell-off in the opening hours of trading. The market, however, reverses and closes near the top, but it could either not cross the previous day’s high or it barely does.  The morning sell-off suggests that the bull is losing control and may end up losing the fight going forward.

The candle has a small body at the top with the opening and closing being close to each other. By itself, it does not signal an end of the rally but forewarns of the coming danger. A crossover below the low of the Hanging Man pattern confirms the end of the rally.

E.g. Procter and Gamble (P&G) has formed Hanging Man candlestick pattern on 20th November, 2017. Means this stock has come to end of the rally and expected to fall in future.

Protecter and Gamble Hanging man candlestick pattern-min

Source of the Charts: Topstockresearch.com on 20th November, 2017.

Also Read: Top Rated Mutual Funds from Value Research Online and Crisil

When should you consider these Candlestick Patterns?


Considering only technical analysis for buying or selling a stock would be a disaster. These candlestick patterns indicate the direction of the stock. If you are tracking a stock and checking a right time to buy or sell, these patterns would be really helpful. Considering blue chip stocks and adding a flavor of technical analysis through candlestick patterns would help you to buy a right stock at a right time.  These are several websites like moneycontrol.com/markets/technical, topstockresearch.com, stockcharts.com which provides technical analysis and various sub parameters under it to filter the stocks that are either bullish or bearish in pattern.

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Suresh

Most Powerful Candlestick Patterns in Technical Analysis of Stock

9 comments

  • Nitin

    Really you doing a good job sir, and heads off…could u provide me hardbound book the same

  • Joseph

    Hello Suresh , This article is quite good for a begginer like me.

    I am keen to learn stock trading specially technical analysis , Can you suggest any online classes which provide good training something I can do along with my job.  Thank You

    • There are thousands of websites. My advice is stick to few large websites like moneycontrol.com, economic times which are large websites. You can check for short term online courses on technical analysis which are offered by thousand of experts. 

    • Sampat kumar

      You can check YouTube, almost everything is there.

  • choiceinvestor

    Sir write your viewon bitcoin ?

  • Narasimha

    Your Articles are simple and realistic with proper data.. If I want to subscribe to an IPO I just look at the Note that " I am intereted in thi sIPO" … Good Job Suresh

  • Sridhar Iyer

    Your articles are superb. Hats off to you.  Especially good for a layman and making them interesting, wholesome and insightful.  Just one typo which I noticed….in the first para, last line ; the word "traded" is used instead of "trader".  Another request that I have made several times earlier…Pls allow Print Mode…so that we can take a proper print out and file them  (they are very useful). 

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