Single candlestick patterns help in analyzing market trends, historical analysis and predicting the future. These are the most effective form of technical indicators. Candlesticks can be considered historical indicators because candlesticks are built on market action that has already occurred. But the candlesticks formed go a long way in understanding future trends and price patterns.
What are single candlestick patterns?
Single candlestick patterns are created by just one candle. There are no multiples or groups of candles and trading signals are generated based on a day’s trading action. Traders typically use 1-day candlestick charts to identify single candlestick patterns. This is one of the easiest forms of technical analysis and takes very little time.
Understanding Single Candlestick Patterns
Single candlestick patterns are classified as trend reversal patterns. There is no single candlestick pattern that is classified as a continuation pattern. However, single candlestick patterns often need to be read in the context of the candlesticks preceding it, and often require confirmation.
The trend reversal pattern should appear in an established trend. They should be ignored in non-trending markets.
There is a need to pay attention to the length of the candle during trading. Length reflects the range of the day. The longer the candle lasts the longer there is buying and selling activity. If the candles are small then it can be concluded that the trade action was executed. Trade eligibility should also be based on the length of the candles. Trading based on subdued short candles should be avoided.
Japanese Candlestick Pattern
Japanese candlestick is a method used to identify current market state and predict future movements. It was initially invented by Japanese rice merchant Munehisa Homma in the early 1700s. Steve Nisson introduced it to the world in his book Japanese Candlestick Charting Techniques, first published in 1991.
It provides a detailed and accurate depiction of market price through graphical presentation. Traders can easily identify the market trend by looking at the length and color of the candlestick. Types of Japanese Candlestick Patterns.
Hammer and Hanging Man
Recognition Criteria for Hammer:
The Hammer pattern occurs when the candle opens at a higher high but is not sustainable there and it drops significantly but can recover with continued buying interest and the candle closes green and near the opening price. Here the length of the wick should be at least twice the size of the body.
The hammer pattern is a single candle bullish reversal pattern that can be seen at the end of a downtrend. The opening price, close and top are at approximately the same price, while a long wick that is a short body is twice as low.
Recognition criteria for Hanging Man
A Hanging Man candlestick pattern occurs during an uptrend and warns that prices may start falling. This candle is created from a small real body with a long lower shadow and short or no upper shadow. The Hanging Man indicates that selling interest is starting to increase. This is a bearish reversal candlestick pattern that occurs after a price advance. The advance can be small or large, but at least some price bars should be composed that are high in total.
The hanging man pattern is just a warning. For the Hanging Man to become a valid reversal pattern the price must move lower on the next candle. This is called confirmation. Traders usually exit long trades or short trades during or after the confirmation candle.
Inverted Hammer and Shooting Star
Inverted Hammer
The Inverted Hammer candlestick pattern is primarily a bottom reversal pattern. This pattern is usually formed when the downtrend is drawing to an end. Inverted hammer candlestick formations occur primarily at the bottom of a downtrend and can act as a warning of a potential bullish reversal pattern.
What happens the next day after the inverted hammer pattern is formed is that it gives traders an idea whether prices will go higher or lower. The formation of an inverted hammer after a long period of time is bullish as prices hesitate to move downwards during the day. Sellers pushed prices back to where they were at the open but rising prices show that the bulls are testing their powers.
Shooting Star
In technical analysis the shooting star is interpreted as a type of reversal pattern. The Shooting Star actually resembles an Inverted Hammer but instead of being found in a downtrend, it is found in an uptrend. It is composed of a candle with a small lower body or little or no lower body, and a long-term upper low that is at least twice the size of the lower body.
The shooting star is actually a hammer candle turned upside down like an inverted hammer pattern. The difference is that the shooting star occurs at the top of an uptrend. This is a bearish chart pattern as it helps end an uptrend. The Inverted Hammer on the other hand is a bullish chart pattern that can be found below a downtrend and signals that the price is likely to trend upward.
List of all single candlestick patterns
Marubozu Candlestick Pattern
In Japanese, Marubozu means ‘the bald’. Therefore, a Marubozu candle has a main body and has no upper shadow or lower shadow. For Marubozu, there are two types of Marubozu candlestick chart patterns: the Bullish Marubozu and the Bearish Marubozu.
As we proceed, let’s take a look at the three main rules that apply to candlestick patterns. These are:
- Buying strengths and weaknesses.
- Being comfortable with patterns.
- Looking for the former trend.
Spinning Top Candlestick Pattern
Similar to the name, it looks like a topspin, with a small true body and nearly identical upper and lower shadows. It may not provide trading signals with specific entry or exit points, but it does provide useful information regarding the current situation in the market.
Doji candlestick pattern
A doji is similar to a spinning top; The difference though is that Doji doesn’t have a real body. Because it does not have a real body, we can say that the open and close price of the stock is almost the same. Doji provides important information about the stock and helps in trading decisions.
A candle with a very thin body can also be considered as a doji because there is no difference between the open and closing price of the stock. Since the doji is the difference between the open and close prices, the color of the candle is not very important. The most important thing is that the open and close prices are almost equal to each other. If you see some sustained doji in the candlestick chart of a stock, it means there is further decision making in the market and it could turn either ways.
