In technical analysis, candlestick patterns are used to predict the future direction of price movement.
In this article, we will discuss what is a candlestick and a few patterns which you should know so that an informed decision can be made during stock market investments.
What is a candlestick?
Candlestick is a way to represent the movement of price graphically for a given period of time. They are generally formed by the opening, high, low, and closing prices of a financial instrument.
Candlestick has three basic features:
- Body – Body represents the open-to-close range.
- Wick/Shadow – Wick or shadow indicates the intra-day high and low.
- Colour – Colour reveals the direction of market movement like a green or white body indicates a price increase, while a red or black body shows a price decrease.
Hammer
![](https://www.volksinfotech.com/wp-content/uploads/2020/02/hammer_bull-3.jpg)
Hammer pattern can be recognized by its short body and lower shadow that is about two or three times the length of the body and a shorter upper shadow or no shadow at all.
The hammer is usually a clear indicator of a declining price reversing its direction and starting to go up.
To be surer it is always good to wait for an additional confirmation such as a green candle closing above the open of hammer.
Bullish Engulfing
![](https://www.volksinfotech.com/wp-content/uploads/2020/02/bull_engulf.jpg)
The bullish engulfing pattern consists of a red candle followed by a bigger green one, which fully engulfs the red candle.
This pattern is an indicator of a market turning point that is, the market may start going up and might be a good time to buy stock.
Morning Doji Star
![](https://www.volksinfotech.com/wp-content/uploads/2020/02/mrng_doji_star.jpg)
The morning doji star pattern appears when there is a slight market movement. This consists of three candles, a red one followed by a doji which is followed by a green candle closing beyond the middle of the first candle. If the green candle is longer than the red one then the signal is more reliable.
Dark Cloud Cover
![](https://www.volksinfotech.com/wp-content/uploads/2020/02/dark_cloud_cover.jpg)
The dark cloud cover appears before the price dropdown. A long green candle is followed by a red one, that opens at a new high and closes below the middle of the green candle. To be surer, can wait for fo another smaller red candle to form and confirm.