Candlesticks patterns and Pyschology

  Candlesticks is a Japanese trading technique invented in the 18 century by rice traders. Today this technique is called candlestick charting and is widely used when drawing stock charts.
 
  Candlestick charts use the same price data as bar charts (open, high, low, close). However, candlestick charts are drawn in a much more visually identifiable way typically resembling a candle with wicks on both ends. The high and low are described as shadows and plotted as a single line.
 

About patterns

  Candlesticks form interesting patterns which give excellent clues above market trend and direction. Patterns are independent of time frame and can even clubbed!
  I have listed my favourites patterns here. These are reliable and the reliability increases dramatically if the previous move is strong.
 

Bullish Patterns:

 
                         

	Morning Star: Occurs after a sustained downtrend. The 2nd day gaps lower, but trades in a small range. The gapdown indicates panic but bulls step in (buy on panic declines) thus limiting the downside. The bullishness of this indecision is confirmed by the higher close of the 3rd day.
	Bullish Tristar: Occurs after a sustained downtrend. This formation is rare, so always be suspect of the data. This pattern is not reliable for stocks with low volume. The huge amount of indecision created by these three dojis must not be ignored by traders. This level of indecision strongly suggests that the trend is about to change.
	Bullish Doji: The downtrend is in full force with a strong 1st day. All confidence built up by the bears from the 1st day is destroyed when the 2nd day's gap down closes near it's open. Short covering will quickly appear if the next day opens higher.
	Bullish breakaway: The down trend is accelerated by a gap down. The next few days trend down, however start to run out of steam. The last day of the formation shows a breakout and close above the previous 3 days, however the gap created on the 1st day remains unfilled. Since the gap is not filled and the trend is obviously deteriorating, this implies the reversal signal.
	Hammer: The long tail and small real body at the top of the trading range indicates strong buying by bulls (buy on panic declines). Bears wonder if this is the end of the downtrend and take measures to cover shorts.
	Bullish Engulfing: Gapdown opening but close above previous days highs. This damages the spirits of the shorts and brings into question the bear trend which prompts additional buying in the coming days.
	Bullish Low: Getting two days with equal closes should alert the shorts that an important support level may have been found. Higher prices may be ahead in the days to come. A higher close the next day would serve as confirmation of the reversal.
	Bullish Tails: Alerts to possible bottoming out. Even though markets are making lower highs and lower lows, buying at lower levels kicks in so markets close towards days highs.
	3 Inside Up: Inside day represents volatility compression. Break of 2 day swing high happens on 3rd day which confirms trend reversal.
	3 Outside Up: utside day represents great volatility as bulls and bears get active. Break of days high on 3rd day confirms trend reversal.
	Bullish Side-by-Side: The last 2 days price action shows that markets are holding above their previous lows (support). The uptrend remains intact as long as the support holds (stoploss).
	Bullish Continuation: Markets take a breather before continuing it's uptrend. Notice that a new low is not seen during the 4 remaining days of this formation. This gives little confidence to the bears, making way for bulls.

 

Bearish Patterns:

  
                      

	Evening Star: Occurs after a sustained uptrend. The 2nd day gaps higher, but trades in a small range. The gapup indicates extreme greed but bears step in (sell when others are greedy) thus limiting the upside. The bearishness of this indecision is confirmed by the lower close of the 3rd day.
	Bearish Tristar: Occurs after a sustained downtrend. This formation is rare, so always be suspect of the data. This pattern is not reliable for stocks with low volume. The huge amount of indecision created by these three dojis must not be ignored by traders. This level of indecision strongly suggests that the trend is about to change.
	Bearish Doji Star: The uptrend is in full force with a strong 1st day. All confidence built up by the bulls from the 1st day is destroyed when the 2nd day's gap up closes near its open. Profit takers will quickly appear if the next day opens lower.
	Bearish Breakaway: The up trend is accelerated by a gap up. The next few days trend up, however start to run out of steam. The last day of the formation shows a breakdown and close below the previous 3 days, however the gap created on the 1st day remains unfilled. Since the gap is not filled and the trend is obviously deteriorating, this implies the reversal signal.
	Inverted hammer: The long upper shadow and small real body at the bottom of the trading range indicates strong selling by bears. Bulls wonder if this is the end of the uptrend and take measures to protect their gains.
	Bearish 2 Crows: The gap created on the 2nd day gets filled by the 3rd day. This quick pull back does not bode well for the bulls. This price action indicates a short term top.
	Bearish Engulfing: Gapup opening but close below previous days low. This damages the spirits of the longs and brings into question the bull trend which prompts additional selling in the coming days.
	Bearish Tails: Alerts to possible topping out. Even though markets are making higher highs and higher lows, selling at higher levels kicks in so markets close towards days low.
	3 Inside Down: Inside day represents volatility compression. Break of 2 day swing low happens on 3rd day which confirms trend reversal.
	3 Outside Down: Outside day represents great volatility as bulls and bears get active. Break of days low on 3rd day confirms trend reversal.
	Bearish Side-by-Side: The last 2 days price action shows that markets are trading below their previous highs (resistance). The downtrend remains intact as long as the resistance holds (stoploss)
	Bearish Continuation: Markets take a breather before continuing it's downtrend. Notice that a new high is not seen during the 4 remaining days of this formation. This gives little confidence to the bulls, making way for the short sellers.