Basic knowledge of candlestick charts: 24 types of candlestick chart interpretations
Candlesticks, also known as candlestick charts, are said to have originated in the 18th century Japanese rice market, where rice merchants used them to represent price fluctuations. Due to their unique drawing method, they have been widely adopted in stock and futures markets. They are drawn from the opening price, highest price, lowest price, and closing price of each trading day (or analysis period). The structure of a candlestick can be divided into upper shadow, lower shadow, and middle body.
A candlestick is a bar-shaped line composed of shadows and bodies. The middle rectangle is called the body; the thin line above the body is called the upper shadow, and the part below is called the lower shadow. Bodies are divided into bullish and bearish candles.
Candlesticks can be divided into daily, weekly, and monthly candlesticks. In dynamic stock analysis software, minute and hourly candlesticks are also commonly used. Candlesticks are a special market language, with different shapes having different meanings.
Candlestick charts have the characteristics of being intuitive, having a strong three-dimensional feel, and carrying a lot of information. They embody rich Eastern philosophical thoughts and can fully show the strength of price trends and changes in the balance of forces between buyers and sellers, predicting future market directions with high accuracy, making them a widely used technical analysis tool in various media and real-time computer analysis systems.
Candlesticks visually represent the changes in the forces of buyers and sellers and the results of practical trading. After nearly a century of use and improvement, candlestick theory has been widely accepted by investors.
24 types of candlestick chart interpretations, classics worth collecting
What is technical analysis used for? Isn't it for predicting trends? This is the thought of many people. Look at this example:
A large bullish candle releases a strong bullish signal. If you buy based on the bullish signal released by the candlestick, believing that the market will rise, you can easily fall into a trap of false bullishness. The true meaning of technical analysis is to discover the facts on the market. Professional traders will develop corresponding strategies based on market facts rather than use them to predict future trends. Before learning candlesticks, you need to remember these three points:
A bullish signal does not equal a bullish outlook for the future;
A bullish outlook does not equal a suitable buying point;
A suitable buying point does not equal stable profit.
Characteristics and basic drawing methods of candlestick charts
Candlestick charts are popular because they reflect market information in a concise, intuitive, complete, and thorough manner.
Compared to the most original trading information, such as delivery orders and intraday charts, it is more intuitive.
Compared to predecessors of candlestick charts, such as line charts and anchor charts, it is more concise.
Compared to indicators like moving averages, MACD, and Bollinger Bands, it is more complete. Most indicators only calculate closing prices and perform various statistical analyses on these prices, losing the raw information. Candlestick charts faithfully and completely record the opening price, closing price, highest price, and lowest price.
Types of single candlesticks and analysis methods
The types of single candlesticks, arranged according to color, body size, and the length of upper and lower shadows, etc., can have more than 30 different types of candlesticks.
1. Look at the color of the candlestick: divided into bullish and bearish candles;
2. Look at the body size: divided into four types
The body amplitude is less than 1%, generally referred to as a doji;
The body amplitude is between 1% and 3%, generally referred to as a small bearish candle or small bullish candle;
The body amplitude is between 3% and 7%, generally referred to as a medium bearish candle or medium bullish candle;
The body amplitude is greater than 7%, generally referred to as a large bearish candle or large bullish candle.
3. Look at the length of the shadows
No upper shadow: a clean head, for example, a clean head bullish candle;
No lower shadow: a clean foot, for example, a clean foot bullish candle;
If the shadow length is more than twice the body, specify it separately, for example, a bullish candle with a long upper shadow.
These more than 30 types of candlesticks only need to be understood, not memorized; in practice, you will naturally become skilled. It is important to remember the three steps to analyze a single candlestick:
First, look at the color of the candlestick; a bearish candle reveals the fact of a decline, while a bullish candle reveals the fact of a rise;
Secondly, look at the size of the candlestick body; the size of the body reveals the strength of the rise or fall. If the body is too small, the color (bearish, bullish) loses its significance.
Third, look at the length of the shadows. The length of the shadows reveals the strength of support and resistance.
Doji
The opening price and closing price of a doji are almost equal, and the body is very small. Depending on the different positions of the upper and lower shadows, they can be classified into long-legged doji, gravestone doji, dragonfly doji, etc.
A doji reveals the fact of a balance between bullish and bearish forces. Generally, a trend reversal is likely to occur after a doji, changing the previous direction of the trend.
If a doji appears during an uptrend, it reveals that the upward momentum is weakening; if a doji appears during a downtrend, it reveals that the downward momentum is weakening.
If a doji appears in a sideways trend or multiple dojis appear in the same price range, then the doji cannot provide a signal for trend change.
The same candlestick pattern appearing in different positions reveals different facts. The key is the trend.
Hammer, inverted hammer, hanging man, shooting star
The hammer and hanging man look very similar in shape:
The body is very short, and the lower shadow is very long; generally, the lower shadow is more than twice the body;
No upper shadow, or the upper shadow is very short;
It can be a bearish or a bullish candle; the color of the body is not very significant;
Appears in a clear downtrend, called a 'hanging man', meaning 'solidifying the market bottom', is a signal that the downtrend is about to end;
Appears in a clear uptrend, called a 'hanging man', an inauspicious name, signaling that the uptrend is about to end.
Flipping the shape of the hammer upside down becomes the inverted hammer. Like the hammer, it is a signal that the downtrend is about to end.
Flipping the shape of the hanging man upside down becomes the shooting star. Like the hanging man, it is a signal that the uptrend is about to end.
Some people refer to the shooting star as an 'inverted hammer' or sometimes as 'shooting star.'
The former is absurdly wrong. The hammer and inverted hammer must appear in a downtrend, signifying solidifying the market bottom. The shooting star appears in an uptrend, meaning 'trouble from the sky.' The position of the candlestick reveals different market meanings.
The latter is a translation error; the Japanese term for shooting star translates to English as 'shooting star,' then back to Chinese as '射击之星,' losing the downward implication of the original name.
Bullish engulfing pattern, bearish engulfing pattern
The engulfing pattern, also known as the engulfing line pattern, is a major trend reversal signal, revealing that the market has ended its previous movement direction and is moving in the opposite direction. There are three criteria for judgment:
The market is in a clear uptrend or downtrend;
The engulfing pattern consists of two candlesticks, and the body of the second candlestick must cover the body of the first candlestick;
The two candlesticks have opposite colors. In the bullish engulfing pattern, the first is a bearish candle, and the second is a bullish candle. In the bearish engulfing pattern, the first is a bullish candle, and the second is a bearish candle. Exception: If the body of the first candlestick is very small, the first candlestick can be either a bearish or a bullish candle.
Bullish engulfing, bearish engulfing, and engulfing patterns look very similar but are actually different.
The engulfing pattern must appear in a clear uptrend or downtrend. Bullish engulfing and bearish engulfing can appear in any trend.
Since the trend is considered in the definition of the pattern, the engulfing pattern has more practical significance in trend judgment.
Pregnant line pattern
The pregnant line pattern is a secondary trend reversal pattern, revealing a weaker trend reversal intensity than the engulfing pattern. It also consists of two candlesticks, and in terms of shape, it is actually just swapping the two candlesticks of the engulfing pattern. There are three criteria for judgment:
The market is in a clear uptrend or downtrend;
The pregnant line pattern consists of two candlesticks, where the body of the first candlestick must cover the body of the second candlestick;
The two candlesticks have opposite colors. In the bullish pregnant line pattern, the first is a bearish candle, and the second is a bullish candle. In the bearish pregnant line pattern, the first is a bullish candle, and the second is a bearish candle. Exception: If the body of the second candlestick is very small, it can be either a bearish or a bullish candle.
If the second candlestick is a doji, it is commonly called a doji pregnant line.
Dark cloud cover and piercing pattern
Dark cloud cover, also called dark cloud line, belongs to a top trend reversal pattern. It reveals the fact that the upward movement has ended and the downward movement has begun. Three criteria for judgment:
The market is in a clear uptrend;
Composed of two candlesticks, the first is a relatively large bullish candle, the second is a relatively large bearish candle;
The opening price of the bearish candle is higher than the closing price of the first candlestick, which exceeds the body of the first candlestick.
The piercing pattern, also known as the cutting line, is similar to flipping the dark cloud cover upside down and belongs to the trend reversal pattern at the bottom. Criteria for judgment:
The market is in a clear downtrend;
Composed of two candlesticks, the first one is a relatively large bearish candle, and the second one is a relatively large bullish candle;
The opening price of the bullish candle is lower than the lowest price of the first candlestick, which is below the bottom of the lower shadow of the first candlestick;
The more the bullish candle's body penetrates the bearish candle, the stronger the bullish momentum. Ideally, the closing price of the bullish candle is above half of the bearish candle's body.
Counterattack line
When the closing prices of two candlesticks of opposite colors are equal, a counterattack line is formed, also known as a rendezvous line.
Criteria for judging bullish counterattack lines:
The market is in a clear downtrend;
Composed of two candlesticks, the first is a bearish candle, the second is a bullish candle, and the closing prices are equal;
The larger the body of the second candlestick, the stronger the bullish momentum.
Bearish counterattack line judgment:
The market is in a clear uptrend;
Composed of two candlesticks, the first is a bullish candle, the second is a bearish candle, and the closing prices are equal;
The larger the body of the second candlestick, the stronger the bearish momentum.
Belt-hold line
The belt-hold line is named after a Japanese sumo term, meaning 'to grab the opponent's belt and push him out of the ring.' The belt-hold line is divided into bullish and bearish belt-hold lines.
Criteria for judging bullish belt-hold lines:
The market is in a clear downtrend;
Composed of a single relatively large bullish candle;
The opening price is the lowest price, with no lower shadow, or a very short lower shadow.
Criteria for judging bearish belt-hold lines:
The market is in a clear uptrend;
Composed of a single relatively large bearish candle;
The opening price is the highest price, with no upper shadow, or a very short upper shadow.
Morning star and evening star
The morning star and evening star are trend reversal patterns composed of three candlesticks. As the name suggests, the morning star reveals a trend reversal signal from down to up, while the evening star reveals a trend reversal signal from up to down.
Criteria for judging morning stars:
Appears in a clear downtrend, composed of three candlesticks;
The first is a bearish candle, the third is a bullish candle;
The middle candlestick's body is relatively small; it can be a bearish or a bullish candle. If the middle candlestick is a doji, it is commonly called a doji morning star;
A standard morning star has two gaps.
In practice, the second gap is not common. The larger the body of the third candlestick and the larger the trading volume, the greater the bullish momentum. When the second candlestick is a doji, it is generally referred to as a doji morning star.
Criteria for judging the evening star:
Appears in a clear uptrend, composed of three candlesticks;
The first is a bullish candle, the third is a bearish candle;
The middle candlestick's body is relatively small; it can be a bearish or a bullish candle. If the middle candlestick is a doji, it is commonly called a doji evening star;
A standard evening star has two gaps.
The evening star and morning star patterns contain a very practical thought process. The three candlesticks' shapes represent the confirmation of the current trend, the alert for trend change, and the confirmation of trend change in sequence. This thought process is more significant than the practical guidance of the pattern itself and is worth reflecting on and practicing.
Three black crows
Three black crows are also called three-winged crows, three-flying crows. 'Good news doesn't leave the house, bad news has wings.' Three black crows are a bearish trend reversal signal.
Criteria for judging the three black crows pattern:
Appears in a clear uptrend;
Composed of three consecutive, relatively large bearish candles;
No lower shadow, or a very short lower shadow;
The standard three black crows, where each bearish candle's opening price is within the body of the previous candlestick (no gaps).
Three black crows are generally used for medium to long-term trend analysis and rarely used for short-term analysis. Flat-top patterns and flat-bottom patterns
In an uptrend, two candlesticks with almost equal highs form a flat-top pattern. It provides a signal of weakening upward momentum. Generally, the flat-top pattern will also appear in combination with other patterns. For example:
In a downtrend, two candlesticks with almost equal lows form a flat-bottom pattern. It gives a signal of weakening downward momentum. The flat-bottom pattern can also appear in combination with other patterns. For example:
The above are commonly used candlestick patterns suitable for beginners to learn and also suitable for experienced traders to review repeatedly. Beginners look at price, experienced traders look at shape, and masters understand meaning. These classics can provide new insights even after years of practical experience.
Seven stock trading insights:
1. Go with the trend.
This is a simple yet indispensable principle; the most important point in stock trading is to not go against the trend. Operating against the trend will only wear down your mindset. In contrast, operating with the trend will make your mindset increasingly calm, and your success rate will be higher. This is mainly reflected in moving averages being in a bullish arrangement, with stock prices above the 60-day moving average, indicating a clear upward trend.
2. Continuously improve during learning.
From the moment you step into the stock market, no one can stop learning; you must continuously update your knowledge and understanding. Various financial news, company reports, and research reports are all sources of information for us to share. Observe how stocks react after specific information appears to train your sensitivity, thus staying calm in changing situations.
3. Choosing is more important than effort.
Efforts in the wrong direction will only be futile; running on the right track can yield twice the result with half the effort. Choose stocks with high performance but low valuation, with a market capitalization below 200 million; such companies are more likely to attract funding and have high growth potential.
4. Learn to read simple technical indicators.
Trading volume is the first important indicator to observe. If a stock breaks out at a low level but does not see an increase in volume, it indicates very poor volume indicators; do not be blinded by the appearance of the stock price. Conversely, if the stock rises on low volume at a high level, it indicates sufficient upward momentum and potential for further increases. Secondly, look at the distribution of shares; avoid participating in stocks with dispersed shares. This means that the main force has not accumulated enough, and it will still fluctuate later. In contrast, stocks with relatively concentrated shares that experience a spike in volume on a particular day indicate that the main force is beginning to lift.
5. Take control of your fate in the stock market.
Many friends do not have their own independent judgments and prefer to adopt the suggestions of others. This is very undesirable, as everyone's judgment of the market is different. Asking a hundred people might yield a hundred opinions, which only disrupts your own judgment and makes decision-making difficult. You need to have your own trading system, listen to your own voice, and if you're right, continue to hold; if you're wrong, strictly cut losses.
6. Be bold in holding profitable stocks.
If a stock is in a hot topic in the current market and shows a pullback during an uptrend, do not rush to exit. Especially if it is a stock that has had consecutive limit-ups; as long as the pullback does not exceed 20%, it's worth watching further. It's hard to get back in once you've missed the dragon's turn.
7. Do not easily touch stocks that have not established a bottom.
Before the bottom is confirmed, any prediction made by oneself is merely wishful thinking. Many friends also determine the bottom based on daily line breakthroughs, but daily lines are often where the main forces use tricks, and false breakthroughs are the norm. A simple yet effective method is to use weekly lines to measure the bottom; long-term breakthroughs are the most genuine. Usually, observe the 90-week moving average, and do not consider anything below it.
That's all for today's sharing. If it helps you, remember to like it so you can easily refer to it for learning. The above is the essence of my 18 years of stock trading experience, shared with everyone, hoping to be helpful. In a structural market, it is difficult to seize opportunities without methods. If you have no direction now, you can follow me, check my homepage for daily systematic reviews, and quality case sharing to give you direction!