If you have ever heard about how intraday traders go about with their job, you will know that they are reliant on repeating patterns of buying and selling from the bulls and bears in the market. This was a revelation discovered and documented by Jesse Livermore (among others) during the stock market boom of the Roaring Twenties. Livermore is known as the pioneer of day trading and his techniques in identifying patterns to make trades are still followed widely today. 

Jesse Livermore’s fascinating story also earned him the lead role in a best-selling novel titled ‘Reminiscences of a Stock Operator’.

Today, you can easily watch patterns and understand market sentiment using candlestick charts, a form of technical analysis. Candlestick charts allow you to have the feel of the market’s overall sentiment by looking at each candle.

What is a candlestick?

A candlestick is simply an illustration of the price movements that have taken place during a certain time period for any traded instrument with volume. A bullish candle (i.e. positive movement) is denoted by a green-colored candle while a bearish candle (i.e. negative movement) is denoted by a red-colored candle.

From a single candlestick during any time frame, you can define four key aspects of price movements throughout the duration. These aspects are:-

  1. Opening price (AKA open) at the beginning of the time frame
  2. Closing price (AKA close) at the end of the time frame
  3. Highest price (AKA high) during the time frame
  4. Lowest price (AKA low) during the time frame

Furthermore, each candle has three parts:-

  1. The body:- It is simply the price difference between the opening price and the closing price
  2. The upper wick:- It is the price difference between the highest price and the close (for a bullish candle) or the highest price and the open (for a bearish candle)
  3. The lower wick:- It is the price difference between the lower price and the open (for a bullish candle) or the lowest price and the close (for a bearish candle)
Bullish and bearish candles

For instance, consider the latest 1-week candle of the Nifty 50 index.

Nifty 50 1-week candle

This candle clearly indicates that from Monday 9:15 am till Friday 3:30 pm, the stock has been in a bearish moment. The price of Nifty 50 opened at 16517.00 and closed at 16450.50. The index reached the highs of 16703.20 and touched the lows at 16380.65.

While you have now been educated on the basic information regarding candlesticks, we will look into how to trade using candlesticks.

There are simple candlestick patterns that clearly indicate market sentiment in a certain direction that you can use to trade and make money. Some of these patterns include:-

A) Marubozu pattern
A marubozu is a simple candle that has no wicks on the top and bottom to indicate strong bullish or bearish demand. In a daily bullish marubozu, the opening price is almost equal to the lowest price of the day and the closing price is almost equal to the highest price of the day. The inverse is true for a bearish marubozu. 

 The reason that the marubozu is such a strong trend indicator is that there is buying or selling demand at every single price point during the day.


        An example of a bearish marubozu is in this 1-week chart of Reliance Industries. Notice the sharp move in the next few weeks post the formation of the bearish marubozu.

2) Bullish/Bearish Engulfing Pattern
In this pattern, you will see the domination of one candle of color over the previous candle of a different color. The low of the second candle will be lower than the low of the first candle, but the high of the second candle will be higher than the high of the first candle.

This pattern is key to signify a reversal trend. For instance, a bullish engulfing could signify the end of a downtrend and the beginning of an uptrend. The same is true for the inverse as well.


An example of a bullish engulfing pattern can be seen in this 1-day chart of ICICI Bank. Notice the downtrend in the stock levels, followed by a bullish engulfing and a subsequent uptrend in the stock prices.

3) Gaps
Gap-ups and gap-downs are very common recurrences in the world of stock markets. A gap-up happens when the stock’s opening price of a day is higher than the closing price of the previous day, while a gap-down happens when the stock’s opening price of the day is lower than the closing price of the previous day.

Gap-ups and gap-downs happen due to heavy interest in the pre-market sessions of the particular day and are a strong signification of a forward pattern. These gap-ups or gap-downs are usually a result of very favorable or very unfavorable news. Note that these gaps can be closed down during the day as well (as what mostly happens), so ensure that the gap is large enough to signify a trend. 

Logically, this pattern can only be applied on one-day timeframe charts.


For example, consider the Yes Bank case study from 2018. There were two massive gap-downs from its all-time high, the latter being worth a massive 10% gap-down. This was in reaction to the news of the scandal, post which the share dropped nearly all its value from its all-time high of ₹404 per share to just ₹11.05 per share.
 

4) Supports and Resistances
While taking up a trade, the supports and resistances can be used to decide your entry point, stop-loss, and target. While the three above candlestick patterns (and many more) may or may not always be reliable, but supports and resistances are.

Supports and resistances are, very simply put, price levels on the candlestick charts that act as barriers, preventing the price from getting pushed higher (in case of a resistance) or lower (in case of a support).

As we can observe in the below chart of Dogecoin, we can see the levels of 5.00 acting as a support, not allowing the prices to fall further, while the levels of 13.00 acting as a resistance, not allowing the prices to rise further.

Conclusion:-

To enter into the field of trading, whether it is intraday or swing trading, one must master the ability to read the sentiment of the market. This can only be done by thoroughly practicing technical analysis and reading candlestick charts on a regular basis.

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