The formation of Chart patterns while analysing the stock market or individual stocks can tell you the current trend and possible movement. Though a line chart can show you only the trend of movement in price, candlestick chart patterns can give a clearer picture.
The series of Candlestick chart patterns provides more insights for traders while analyzing the stock technically. You can combine multiple candles and apply other indicators to know the trend, and next move of the underlying asset, and based on that can make buying or selling decisions.
Also Read: How to Identify Trend in Stock Market: 10 Points to Find Trend
Apart from short-term trading decisions, candlestick chart patterns are very useful for intraday trading or day trading decisions. There are multiple candles but few of them are more effective while analysing from an intraday trading perspective. Hence, we are going to discuss about the candlestick charts that are best for day trading and candles for option trading.
What do Candlestick Patterns Mean?
Maybe you are aware of the candlestick charts and their different patterns, but still, we need to revise what exactly the candlestick charts are. The candlestick charts are the formation or shape of price movement of the market index or individual stock for a selected period (hours, a day, week or month) in red or green colour candles with tails (wicks) or no tails.
The green candle means the price of the underlying security closed above the open price, while the green candle represents the close price below the open price. The tails on the upper and lower sides also called wicks show the highs and lows in the price movement. Sometimes the candle is formed in a rectangular shape and there are no wicks.
How Many Types of Candlestick Patterns are there?
As per the market experts, there are around 42 different types of candlestick chart patterns that are recognized. However, However, as per Author Thomas Bulkowski who analyse these candles more deeply, found there are 103 types of candlestick formations.
Understanding and analyzing all types of candlestick charts is not possible for everyone including investors or traders. Even traders use only a few selected and effective candlestick charts that can give true signals for day trading. So, we will discuss here only the best candlestick patterns that are suitable for intraday trading or day trading.
Also Read:7 Biggest Mistakes To Avoid While Doing Intraday Trading
Best Candlestick Patterns for Day Trading
Hammer Candlesticks Pattern
The pattern can be picturised from the name itself, a pattern is said to have formed when a candlestick has a short body with a long wick on the lower side that looks like a hammer. When such pattern is formed at the end of a downward trend or during the end of a pullback, it would reflect a potential trend reversal or continuation and an area of strong buying.
Compared to a red candle if the body of the hammer is green, a strong bull market. Similarly, an inverse hammer candle is formed with a short body and a long upper wick.This candle also formed at the bottom of the downward trend giving the buying signal. You can use the hammers for day trading with a strong buying signal if there is significant volume.
Engulfing Candlestick Patterns
An engulfing patter is said to have formed when the previous candle body is overshadowed by the next candle body. Suppose the previous candle closed in red with a small body, and the next candle closed in green with a long body shape, entirely engulfing the previous candle. Then it is a bullish engulfing pattern.
For bearish engulfing candle, the previous candle closed in green with a small body, and the next candle closed in red with a long body shape, entirely engulfing the previous candle.
Morning and Evening Star
The morning starts candlestick chart patterns are formed at the bottom of a downtrend, in which the first candle is like the morning star a bearish candle that indicates the downtrend. The second candle is a small one liking like doji, and the third one is a large bullish candle that ends at the top of the day.
These three candle formations show, that there is a bearish trend but bulls taking control and there is a trend reversal giving the trading opportunity for the traders to enter into long position for the day or intraday. You can wait for the next green candle for the validation, but for intraday, there is not enough room to book large profits, except for small margins.
Hanging man for Day Trading
A hanging man can drop anytime if anything happens unfavourable. Similarly, the hanging man candlestick chart pattern has a short body with a long lower wick. This candlestick is formed at the top of the uptrend showing bears have taken the market into their grip and further, there could be selling reassure giving the signal of a bearish trend.
Also Read: How to Identify Trend in Stock Market: 10 Points to Find Trend
You can use the hangman for intraday trading with a short-selling strategy to book the profits when the market further goes down. Day traders can also use this candle to book the profits in the long positions and exit before the market turns down into a bearish trend.
Shooting Star for Day Trading
Again as the name says, a shooting star coming from the sky falls on the earth, similarly, a shooting star candle is formed with a short body and a long wick on the upper side. Usually, a shooting star is located at the top of the uptrend and indicates there is selling pressure in the market.
Before the formation of the shooting star candlestick, the market opened higher than the previous day and green candles formed before crashing like shooting stars. Here as a day trading strategy, as soon as a shooting star candlestick is formed, you can either book profits in long positions or enter into short-selling and wait for the continuation of the bearish trend.
Three Black Crows
If you are looking to short-sell in the market or take advantage of stock price trading into a bearish trend, then the formation of three black crows gives a strong bearish signal in the market. Three black crows consist combination of three red candles with short wicks.
The combination of these three red candles one after other shows there is a strong bearish trend in the market. Intraday trading can use this candle formation for short-selling as the accuracy of these candlestick chart patterns is very high. However such candlestick chart patterns are rarely formed during market hours. You can also use these candles for long-term investments.
Also Read: Things to Consider Before Buying Stocks for Long Term: 10 points
Three White Soldiers Pattern
Just like the three black crows showing a bearish trend, the three white soldiers' candlestick chart patterns are bullish candlestick chart patterns. It is a combination of three green candles with each succeeding candle should open and close higher than the previous day.
Three white soldiers' candlestick chart patterns show, there is a strong indication of a bull market after the downtrend. And for day traders it is a strong signal to enter into the long position and book the profits until the bullish trend has not ended or there is a trend reversal.
Also Read: Bullish Trend Reversal Candlestick Patterns
The Supernova or Waterfall Pattern
The waterfall candlestick (bearish) chart pattern that is also known as supernova (bullish) is also one of the best candlestick chart patterns for day trading. This type of candlestick chart pattern is formed when there is significant news related to an underlying or broader market. You can easily recognize this candle as it includes higher volatile move with each bar being stronger than the previous one.
However, for day traders this candlestick chart is quite tricky to trade but remember the market is not going to move in an upward direction always. But when such patterns are formed there could be sharp trend reversal that can happen anytime due to profit booking.
Also Read: Which Candlestick Pattern is Most Reliable for Trend Reversal
Other Candlestick Chart Patterns for Day Trading
Apart from these popular candlestick chart patterns, cup handles, head and shoulder, double-bottom, rounding bottom, pennant pattern, ascending or dissenting triangles and symmetrical patterns are also candlestick patterns that you can use for the day trading.
These candlestick patterns are not a combination of two or three candles; it is a series of multiple candlesticks showing certain trends or patterns in the entire market. To visualise these trends, you need to draw a trend line and analyse the formation of the entire charts covered under the trend lines. Based on that you can make the right decision for day trading or also for long-term investment.
How to Use Candlestick Patterns for Day Trading?
Recognizing the candlestick chart patterns in early trades, like head and shoulder pattern, do most of the work and this art come after years of watching charts and analysing trends. Early recognition of the candlestick chart patterns will not only help you to choose the right entry and exit points but also maximize the chances of getting the profits.
For intraday trading, you need to be very careful while utilizing the power of different types of candlestick chart patterns. Based on these candlestick chart patterns define your trading strategy that should also be included like identifying the trend, finding the right entry or exit points to book the profits and making your intraday trading strategy successful.
Also Read: What are the Best Entry and Exit Indicators in TradingView
Candlestick Trading Strategies:
Identify The Trend:
You can use the candlestick chart pattern for a trend reversal or continuation of the trend. You can use the hammers or morning or evening star candlestick chart patterns for the trend reversal, and enter into the trade position as per the trend in the market or stock. Using the technical indicators to confirm the trend will make your trade decision more accurate.
Support and Resistance:
For intraday trading finding the support and resistance of underlying assets helps to know the trading range. You can use the swing trading based on this trading zone and if stock breakouts or breakdowns from this trajectory, you need to decide the right stop-loss. Hence draw a trend line, or use the indicators to define the support and resistance levels.
Also Read: Support and Resistance: How to Find Support & Resistance
Find the Entry & Exit Points:
One of the main motives of finding the support and resistance is identifying the entry and exit points that will help you to enter into a new trade. For day trading entering and exiting at the right levels can make the difference when trading with thin profit margins. Analyses the candlestick chart patterns like doji, morning start etc. to find the entry and exit points.
Applying the Technical Indicators:
A trading strategy without using any technical indicator is not going to become successful. Yes, to make your candlestick trading strategy robust and more effective use technical indicators like Moving Averages, RSI, MACD, Fibonacci Retracement, Bollinger Bands, Supertrend and best volume indicators for day trading or short-term trading.
Define Your Timeframe:
For analysing the candle stick pattern you need to define time frame. If you are analysing data over the longer term, then you need to move from higher time frame to lower time frame (from monthly -> to weekly -> to daily). If you are analysing for short term or intraday, then start from daily to minute charts (Daily -> hourly -> minutes). Moving from higher to lower time frame brings about new finding like gaps formation, strength of trend, support & resistance points etc.
Candlestick Patterns for Option Trading
For option trading, you can also use the same candlestick chart patterns that we have discussed above for day trading. In the option market, the volatility is very high hence many times the candlestick chart patterns are not formed in the right way. Therefore option trading is also very risky, but there is the advantage of holding your position for up to a month.
Also Read: Types of Risks Associated with Investing in the Stock Market
However, in the future and options market, the volume of trade in the main index like Nifty Future or NSE Option Chain and options contracts of a few top companies are high. In such underlying assets where liquidity and volume of trade is very high, you can use the candlestick chart patterns to analyse the market or stock trend and take the right trading accordingly.
To understand and analyse the options market more effectively and make the right decisions for buying and selling the contracts you can use open interest data for trading. The change in the open interest with the change in the price of the underlying security shows the trend and sentiments of the traders. You can choose the right option contract as per change in the open interest and also apply the technical indicator before making any decision of buying or selling.
Summing-up
Candlestick chart patterns are already one of the best tools you can use for trading. However, most of the candlestick patterns for day tradingcan be used for technical analysis from the trading perspective. However, few of them are quite effective for intraday and for better results, you can choose the right time frame while analyzing the candlestick chart patterns.
Also Read: How to Read, Analyse& Use Candlestick Chart Patterns for Trading
For day trading choosing the daily, hourly and minutes-based candlestick chart patterns with the best technical indicators for intraday trading will provide you with better insights into the stock price or market index movement. And to select the best stocks for intraday trading you need market experts who can better make use of candlestick chart patterns and technical indicators.
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