#24.

Gap Up and Gap Down

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How to Analyse Candlestick Chart Patterns for Day Trading
#1. Understand the Time Frames
#2. Know What is Price – Action Analysis
#3. Learn About Bullish and Bearish Candles
#4. Understand Trend, Corrections and Consolidation
Expert Advice

What are Candlestick Chart Patterns

Candlestick charts are made up of red and green candles.

Each candle represents the range of prices during a particular time

period. In a 5-min candlestick chart, each candlestick represents a 5 min
period; in a 10 min candlestick chart, each candlestick represents a 10
min period and so on.
Green
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period is higher than the opening price.

Red candles represent that the closing price at the end of the time period
is lower than the opening price.

Let’s say you open a 10-min candlestick chart of stock at 9.30 am when
the price is Rs. 230. If the price goes up and ends up at Rs. 233 at 9.40
am, the candle formed will be a green candle.

Candle body – The highlighted portion (green or red) is the body of the
candle which denotes the opening and closing price. So, the lower end of
the body is the closing price in a red candle and the upper end of the
body is the opening price.

Similarly, the lower end of the body in a green candle is the opening price
and the upper end of the body is the closing price.

Candlewick – the upper shadow and the lower shadow represent the
wick of the candle. The wick of the candle denotes the range of prices at
which the stock has traded in that time duration.
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For example, if the price had gone up to Rs. 234 and gone down to Rs.
225 in the 10 minutes, the length of the candle wick would have been
from 225 to 234. And the body formed will be in the price range of Rs 230
& 233.

24 Candlestick Patterns to Learn for

Intraday Trading
If you have read and understood the article so far, interpreting
candlestick patterns will be a cakewalk for you. There are many
candlestick patterns. We will be covering some common candlestick
patterns that you can learn to start intraday trading in this article.

#1. Hammer Candlestick

A Hammer is a bullish signal, consisting of a short upper body and longer

lower wick. It indicates that the prices bounced back even after selling
pressure.
Save UptoThus,
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the trend has changed to bullish.

Both red or green hammers are bullish indicators but green hammers are
stronger bullish indicators because it means that the buyers are gaining
control.

#2. Hanging Man

A hammer formation at the top of an uptrend is called a Hanging Man

and is a bearish signal indicating the end of the uptrend. The long lower
wick indicates that the buyers have tried to keep the prices up but the
sellers are gaining control.
As youUpto
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the hanging man formation.

#3. Inverted Hammer

An inverted hammer at the bottom of a downtrend is a bullish trend

reversal signal. It indicates that the buyers were able to resist selling
pressure as sellers were not able to take the price down much.

If there is a green candle after the inverted hammer, it would give further
confirmation of a trend reversal.
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#4. Shooting Star

The inverted hammer formation at the top of an uptrend is called a

shooting star. It is a bearish trend reversal signal. The long upper wick
indicates that the buyers were not able to take the prices up, as sellers
are gaining control.

If there is a red candle after the shooting star, it would give further
confirmation of a trend reversal.
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#5. Spinning Top

A spinning top is indicated by a short body candle with a long upper and
lower wick. This candle indicates that neither the buyers or sellers could
gain control and hence, the opening price and closing price were close to
each other.

A spinning top shows indecision and might be a neutral candlestick

indicating a pause in the trend or a continuation.
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#6. Bullish Spinning Top

A spinning top at the bottom of a downtrend could indicate a potential

trend reversal. If there is a spinning top after a continuous downtrend and
the candle after the spinning top is a green candle, it may be a sign of
trend reversal.
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#7. Bearish Spinning Top

A spinning top at the top of an uptrend could indicate a potential trend

reversal. If there is a spinning top after a continuous uptrend and the
candle after the spinning top is a red candle, it may be a sign of trend
reversal.
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#8. Doji Candlestick Pattern

The Doji is formed when the opening and closing price of a candle is
almost the same. Thus, the candle looks like a ‘+’ sign. The Doji might be
a red or green candle, representing indecision in the market, i.e. neither
the buyers or sellers are in control.
ASave
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Upto 90% onat the top or bottomOpen
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generally indicates
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trend reversal. To better understand it, look at the above image. Each
green candle is clearly showing that the buyers are taking the price
higher.

But then there is a Doji, where the buyers have been unable to take the
price higher like in the previous green candles, which signals that the
sellers have come in action. Thus, prices have come down following this
Doji.

A Doji can also sometimes be a neutral sign indicating pause or pullback

in a trending market.

#9. Dragonfly Doji

A dragonfly doji looks like a ‘T’ sign. The dragonfly doji at the bottom of a
downtrend could mean that price may gain strength in the near term.

It indicates that the sellers tried to push the prices lower, but could not do
so because of the buyers’ strength.
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#10. Gravestone Doji

A gravestone dragonfly doji looks like an ‘inverted T’ sign. The gravestone

doji at the top of an uptrend could mean that the price may weaken in the
near term.

It indicates that the buyers tried to push the prices upwards, but could
not do so because of the sellers’ strength.
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#11. Marubozu Candlestick Pattern

A marubozu is a full body candle with no upper or lower wick. The

marubozu candle indicates strong buying or selling.

If the marubozu is green, it means that there is strong buying as the

prices have closed at the highest price of the particular time frame.

If the marubozu is red, it means that there is strong selling as the prices
have closed at the lowest price of the particular time frame.
ASave
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the bottom of aOpen
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uptrend reversal. If it appears during an uptrend, it indicates the
continuation of the uptrend.

A red marubozu at the top of an uptrend may indicate a possible

downturn reversal. If it appears during a downtrend, it indicates a
continuation of the downtrend.

#12. Bullish Engulfing

A Bullish engulfing candle is a big green candle that is preceded by a

smaller red candle. The green candle should be longer than the red
candle, completely engulfing it at both the upper and lower end.

The candle opens lower than the closing price of the previous red candle
but closes higher than the opening price of the previous red candle. The
bullish engulfing candle can be a sign of a trend reversal when it appears
at the bottom of a downtrend.

#13. Bearish Engulfing

ASave
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smaller green candle. The red candle should be longer than the green
candle, completely engulfing it at both the upper and lower end.

The candle opens higher than the closing price of the previous green
candle but closes lower than the opening price of the previous green
candle.

The bearish engulfing candle can be a sign of a trend reversal when it

appears at the top of an uptrend.

#14. Bullish Harami

A bullish harami is a small green candle appearing after a big red candle.
The length of the body of the green candle is approx. 1/4th of the body of
the preceding red candle.

This pattern appearing after a downtrend can be a bullish sign.

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#15. Bearish Harami

A bearish harami is a small red candle appearing after a big green

candle. The length of the body of the red candle is approx. 1/4th of the
body of the preceding green candle.

This pattern appearing after an uptrend can be a bearish sign.

#16. Piercing Line

A piercing line is a bullish pattern appearing at the bottom of a

downtrend. In this pattern, a green candle opens lower than the
preceding red candle but closes above 50% of the length of the red
candle.
The pattern
Save is confirmed
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on brokerage Opencandle after the
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also green and makes a high above the piercing line candlestick.

#17. Dark Cloud Cover

This is a reversal formation, represented by three candles. In this pattern,

a red candle is formed after three or more consecutive green candles.
The pattern
Save is confirmed
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on brokerage Opencandle after the
FREE Demat dark cloud
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is also red and fails to make a high above the dark cloud cover
candlestick.

The dark cloud cover candle indicates that the buyers tried to take the
prices higher (denoted by the higher opening price of the red candle) but
sellers have gained control as they took the prices substantially below
the opening price, thus forming the dark cloud cover candle.

#18. Morning Star

This is a 3-candle pattern which is an indicator of a trend reversal when it

occurs after a downtrend. The first candle is a long red candle followed
by a gap-down small green candle. The third candle is a gap-up long
green candle.

The morning star indicates that the buyers have taken charge and hence,
a possible bullish sign.
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#19. Evening Star

This is a 3-candle pattern which is an indicator of a trend reversal when it

occurs after an uptrend. The first candle is a long green candle followed
by a gap-up small red candle. The third candle is a gap-down long red
candle.

The evening star indicates that the sellers have taken charge and hence,
a possible bearish sign.
#20. Bullish
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This pattern is similar to the Morning Star pattern. The difference is that
the second candle is a doji instead of a small green candle.

This type of pattern after a downtrend is a sign of trend reversal.

#21. Bearish Abandoned Baby

This pattern is similar to the Evening Star pattern. The difference is that
the second candle is a doji instead of a small red candle.

This type of pattern after an uptrend is a sign of trend reversal.

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#22. Three White Soldiers

This pattern indicates a reversal when it is formed after a downtrend. In

this pattern, there are three consecutive green candles.

Each candle’s opening price is higher than the previous candle’s closing
price. Also, each candle’s closing price is higher than the previous
candle’s closing price.
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This type of pattern is generally a strong indicator of a trend reversal

because each red candle in this pattern is closing lower than the previous
candle which indicates strong selling in the market.

A good entry point to trade this pattern would be when the fourth candle
after the three white soldiers appears to be closing in the green.

#23. Three Black Crows

This pattern indicates a reversal when it is formed after an uptrend. In

this pattern, there are three consecutive red candles.

Each candle’s opening price is lower than the previous candle’s opening
price. Also, each candle’s closing price is lower than the previous candle’s
closing price.
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This type of pattern is generally a strong indicator of a trend reversal

because each red candle in this pattern is closing lower than the previous
candle which indicates strong selling in the market.

A good entry point to trade this pattern would be when the fourth candle
after the three black rows appears to be closing in the red.

#24. Gap Up and Gap Down

When a new candle forms at a gap above the preceding candle, it

indicates the strong bullish sentiment. It means that the buyers are
willing to buy at a higher price than the last traded price and might be an
indication that the stock will go up further.

Similarly, if it forms at a gap below the preceding candle, it indicates

strong bearish sentiment indicating the possibility of further decline of
prices.
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How to Analyse Candlestick Chart Patterns

for Day Trading
You can get real-time candlestick charts of any stock in your trading
platform.

I am using the Zerodha Demat account to show the candlestick analysis

process. You can open an account with Zerodha If you are looking to
open a Demat account.
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You just need to search the stock name in the search bar and scroll over
the stock name to open the candlestick chart of the particular stock.

#1. Understand the Time Frames

Candlestick Charts are of different time frames. For day trading, 5-min,
10-min or 15-min candlestick charts are used, if you want to enter and
exit a trade
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few minutes by Open
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fluctuations in prices. This is called scalping.

For example, a stock like Reliance continuously moves 2-3 rupees up and
down almost every minute. If you want to capture this Rs. 1-2 price
movement, you can use 5-min or 15-min charts.

If you wish to capture a larger movement of prices, you can use 30-min, 1
hour, 3 hour and Day charts to study the price action.

On a candlestick chart, the time is plotted on the x-axis and the prices on
the y-axis. So, the candlesticks get plotted along the time scale as per the
range of trading prices.

#2. Know What is Price – Action Analysis

You getUpto
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chart.

In trading circles, it is said ‘Bhaav Bhagwan hai’. This means that ‘Price is
God’. You can make a prediction of the stock price in the near future by
observing the current price fluctuation of stock.

In day trading, the main goal is to identify the ‘trend’ of the stock i.e.
whether the stock will go up or go down. Price action analysis will help
you do that. If a stock seems to be going up, it is on ‘uptrend’.

If the stock seems to be going down, it is said to be on ‘downtrend’.

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Once you are able to identify the trend of the stock, you can enter a trade
in the stock to ride the trend. For instance, if a stock is on an uptrend, you
can go long (i.e. buy trade) in the stock and exit the stock after capturing
a part of the up move.

#3. Learn About Bullish and Bearish Candles

The strength of the buyer and sellers influenced the stock price
movements. If buyers are stronger, the candlesticks will be ‘bullish’, and if
sellers are stronger, the candlesticks will be ‘bearish’.

Candles with full bodies represent strong buying (if green candle) or
strong selling (if red candle). This is because a full-body candle basically
means that the stock has traded at all prices in a particular time range,
representing strong buying or selling.
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If a candle has a long upper and lower wick, it indicates volatility in prices
as it means that the price has gone up and down a lot but has not
sustained at either level.

Candles with a body at the upper end with a long lower wick indicate
bulls are in control. Similarly, candles with a body at the lower end with a
long upper wick indicate bears are in control.

You will not be able to decide whether a stock is bullish or bearish just by
looking at 1 candle. You will have to analyze a series of candles to
analyze the price action in the stock.

#4. Understand Trend, Corrections and

Consolidation

A candlestick chart tells you a story about the stock price. If you are able
to read the story well, you can make a winning trade.

1. Trends and Corrections

IfSave
the stock
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90% onis continuously
brokerage going upFREE
Open or down
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Now
it is showing a trend. The trend could be for a day, a week, a month or
even a year.

But a stock will never continuously keep going up or down. There are
periods of correction during a trend when the price will move in the
opposite direction for a while before continuing the original trend.

If the correction continues for a long period of time, it might be an

indication of a trend reversal.

If you look at the candlestick chart entirety, you will see the signs of the
end of a trend. If you observe a trend, it will appear like a wave.

For instance, in an upward trend, there will be a series of bullish candles

and then some correction candles before there is a series of bullish
candles again.
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Longer waves indicate stronger trends. If the waves get shorter, it might
be a signal of trend exhaustion and possibly the end of a trend.

Let’s say Cipla stock opens at Rs. 700 on market opening which is 2%
above the previous day’s closing. It keeps going up till it hits Rs. 720.
Then it corrects and comes back to Rs. 710.

At the end of the day, the stock closes at Rs. 725. In this example, the
stock was on an upward trend but the retracement to Rs. 710 was a
temporary correction.

2. Consolidation
There
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range and does not give much opportunity to make a profit.

In a consolidation phase, neither the buyers or sellers are in control. Once

one side takes control, there is a ‘breakout’. A breakout can be the
beginning of a new trend.

Let’s say ITC stock opens at Rs. 190 and goes up to Rs. 193. Then it
comes down to Rs. 189 and sustains in the range of Rs. 189-192 before
finally closing at Rs. 191.5. In this example, the stock is said to be in
‘consolidation’.

Expert Advice
You see one of the candlestick patterns mentioned above, does not
mean that you can blindly enter a trade. For instance, just because there
isSave
a bullish
Uptohammer formation at theOpen
90% on brokerage bottom ofDemat
FREE a downtrend
Account does
Nownot
necessarily mean that you will definitely make a profit if you go long.

You should not take action just by looking at one candlestick pattern. You
should wait for a few candles to confirm your view about the trade,
especially in the starting phase.

You will also need to look at the market conditions in the entirety to
formulate your trading strategy.

For instance, if there is some news during market hours that can cause
sudden negative/positive sentiment in the market, (like Indo-China border
tension, trade war, regulatory changes, company declared a stock
dividend) no matter what the technical chart was indicating earlier, the
prices will react to the news.

Good traders often use technical indicators in addition to candlestick

patterns to plan their trades. You can easily start earning Rs 1000 daily in
intraday trading if you learn how to combine candlesticks with trading
strategies.