How to do Technical Analysis of Candlestick?

How to do Technical Analysis of Candlestick?

Technical analysis is a powerful technique for identifying and evaluating potential investing and trading opportunities in the stock, cryptocurrency and forex markets. Learning how to do technical analysis of Candlestick pattern is essential for beginners. In this article, you will learn how to read these charts, their analysis, their importance and their types in financial trading.

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Technical analysis is a powerful technique for identifying and evaluating potential investment opportunities. It comprises many tools, charts and indicators that help you study price and volume movements.

  • Bearish candlestick patterns
  • Bullish candlestick patterns
  • Hanging man
  • Bearish engulfing
  • Evening star
  • Three black crows
  • Hammer
  • Inverted Hammer
  • Bullish engulfing
  • Piercing line

Technical analysis of candlestick charts

Unlike fundamental analysis, technical analysis focuses on security prices and trading volumes instead of business fundamentals and the financial results of the stock issuer.

In other words, analyzing price and volume trends or patterns helps you understand the overall market momentum and identify buy/sell opportunities.


These trends and patterns also reflect the interaction between demand and supply forces and the resultant security market price. Thus, technical analysis is an indispensable tool for making price forecasts and predicting market volatility.

The technical analysis comprises tools, charts, and indicators that help you study price and volume movements. Candlestick charts are one of the most popular and commonly used trading signals by stock traders consider across the globe.

How to read candlestick chart for trading

Candlesticks chart analysis is a method of depicting a security’s price movement. Every candlestick has three basic components. They are as follows:-

  • Body: It represents the difference between the open and close prices of the security in a trading session.
  • Wicks: They represent the highest and lowest security prices within a trading session. There are two wicks – upper and lower.
  • Color: The color of a candlestick determines if the price has moved above or below the session’s open price. The candlestick is green or bullish if the close price is higher than the open price.

Similarly, a red or a bearish candlestick indicates that the session’s close price is lower than the open price.

This individual candlestick pattern for beginners helps them to understand the direction, and formulate the. Price action strategy we will do the technical analysis on some of the main candlestick patterns in the consecutive sections.

Types of Candlestick Charts in Technical Analysis

Bearish candlestick patterns

Bearish candlestick patterns start forming when the end of a bullish trend is nearing. In other words, they indicate a bullish trend reversal and the beginning of a price downtrend.

They represent strong signals for traders to go short as the stock price is poised to spiral downwards. Some of the commonly occurring bearish candlestick patterns are explained below.

Hanging man

Hanging man is a popular method of technical analysis of Candlestick patterns in forex. The hanging man is the bearish version of the hammer occurring at the end of a bullish trend. It is a red candlestick with a small body and an elongated lower wick.

It implies that heavy offloading activity has occurred during the day. In other words, sellers outnumbered the buyers, thereby exerting downward pressure on the security price leading to a bullish trend reversal.

Bearish engulfing

This two-candlestick pattern comprises a small green candle completely engulfed by a big red candle. It indicates that the bullish trend has peaked and is poised to spiral downward.

The lower the big candle, the stronger the impending price downtrend. This technical analysis helps you to understand the bullish trends and movement of candles.

Evening star

It is a 3-candlestick pattern with a small red candle hemmed between a long green and red candle. The longer the red candle is than the green candle, the stronger the bearish trend will be.

Three black crows

It is a 3-candlestick pattern comprising successive red candles with extremely short or no wicks.

This pattern implies that the open price was the same as the previous day, but heavy selling volumes pushed the close price lower and lower for three consecutive days resulting in a strong price downtrend.

Technical Analysis of Candlestick

Bullish candlestick patterns

It forms towards the end of a price downtrend. In other words, they signal a bearish trend reversal and the commencement of a price uptrend.

These patterns are strong indications for traders to go long as the stock or indices price is low at this point in time. Traders buying low-price stocks can maximize their gains from the impending upward price trajectory.

While there are many bullish candlestick patterns, we would enlighten you on some of the most common patterns. They are listed below.

technical analysis


Hammer is the most popular tool for technical analysis of Candlestick charts in forex trading. This candlestick pattern comprises a smaller body with an elongated lower wick. It occurs at the bottom of a declining price trend.

The body color of the candlestick is immaterial, but a green hammer candlestick pattern is considered a stronger bullish signal. A hammer implies that buying pressures have overtaken selling pressures. The security price is assured of an upward movement.

Inverted Hammer

A reverse hammer has a small body like the hammer but with an elongated upper wick. It implies that selling pressures overtook buying pressures for some time but couldn’t sustain themselves.

Eventually, buying pressures regained strength and surpassed the selling pressures indicating the beginning of a bullish trend.

Bullish engulfing

It is amongst the best candlestick charts for technical analysis. It is formed by two candlesticks – one small and one big. A big green candlestick completely overlaps a small red candlestick.

A bullish engulfing pattern means that the big candlestick opened lower than the previous close price but eventually finished higher than the previous open price.

It implies that the demand for the concerned stock is higher than its supply. In other words, more buyers have entered the market, exerting upward pressure on the stock price.

This candlestick pattern is a strong bullish sign if more than four red candlesticks precede it. Hence, you can expect a bearish trend reversal.

Piercing line

This candlestick pattern comprises two long candles – a red candle succeeded by a green candle.

A considerable gap exists between the red candle’s close price and the green candle’s open price.

It implies that heavy buying volumes have pushed the stock price above the mid-price of the previous trading session or day.

Final words

Technical analysis of Candlestick patterns is valuable for stock-market and other investing. There are 1-candlestick, 2-candlestick, 3-candlestick, and 4-candlestick patterns are widely used.

While some candlestick patterns are easy to analyze, you will gain mastery over the complex ones with discipline, relentless practice, and by following effective trading tips.

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