Traders looking to generate returns from short-term price movements in assets usually prefer analysing and examining candlestick patterns to predict future trends and momentum. However, going through candlestick charts manually can take up a lot of time, which may lead to missed trading opportunities. Here's where a candlestick pattern screener can help.
A candlestick screener is a tool that's used to identify potential trading opportunities by analysing candlestick patterns. The screener can scan vast amounts of historical and real-time market data to identify specific candlestick formations, such as doji, bullish and bearish engulfing or hammer patterns. With the help of this stock screener, you can shortlist stocks depending on the candlestick criteria you choose, allowing you to make informed decisions like when to buy or sell a stock.
A candlestick is essentially a visual representation of the price movement of an asset. It has three distinct parts - a coloured rectangular body (candle), a thin upper line (upper shadow or upper wick) and a thin lower line (lower shadow or lower wick).
The candle represents the opening and closing prices of the asset, whereas the upper and lower wicks represent the highs and lows that the asset reached during the specified time frame. The colour of the candle can either be green or red depending on how the asset moved during the time frame.
Research 360 by Motilal Oswal offers a comprehensive candlestick stock screener in India. The candlestick patterns are categorised into two types - 'Bullish' and 'Bearish'. Select the candlestick pattern from either of the two drop-down lists and the stock screener will instantly filter and display the list of stocks that have recently exhibited the chosen candlestick pattern.
There are more than 80 formally recognised candlestick patterns that traders around the world use. Here are some of the most popular and widely occurring patterns.
Doji The doji is one of the most important candlestick patterns. It is characterised by long upper and lower wicks and a very short body. A doji represents indecision or a pause in the trend. If the pattern appears during a bearish or bullish trend, it may signal a potential reversal.
Dragonfly Doji A dragonfly doji is a variation of the standard doji. It is characterised by a long lower shadow and a short or non-existent upper shadow, making the pattern look like a 'T'. The dragonfly doji usually appears during a bearish trend and may signal a potential trend reversal.
Gravestone Doji The gravestone doji is characterised by a long upper shadow and a short or non-existent lower shadow. The body of the candle is situated right at the bottom, making the pattern resemble an inverted 'T'. It generally appears during a bullish trend and may signal a potential trend reversal.
Hammer and Inverted Hammer The hammer looks very similar to a gravestone doji but with a thicker green body at the top of the candle. The inverted hammer is essentially an inverted hammer pattern. Both the hammer and inverted hammer are bullish candlestick patterns that generally appear during a bearish trend, signalling a potential reversal.
Hanging Man and Shooting Star The hanging man has a red body at the top with a long lower wick, whereas the shooting star has a long upper wick and a red body at the bottom. Both of these patterns appear during a bullish trend and may indicate a future reversal.
White and Black Marubozu The Marubozu is characterised by a long body and non-existent upper or lower wicks. A white Marubozu is created when the price opens at the day's low and increases throughout the session. If it appears at the end of a bearish trend, it may signal reversal. A black Marubozu is the reverse and may signal reversal at the end of a bullish trend.
Bullish and Bearish Harami The bullish Harami is a two-part pattern with a long red candle followed by a short green candle fully contained within the red candle. The bearish Harami is the inverse. Both signal potential trend reversals.
Bullish and Bearish Engulfing Pattern The bullish engulfing pattern is characterised by a short red candle followed by a long green candle that completely engulfs it. The bearish engulfing pattern is the reverse. Both signal potential trend reversals.
Morning Star A sign of trend reversal, the morning star candlestick pattern usually appears at the end of a bearish trend. It consists of three candlesticks - a long red candle, a short red candle and a long green candle.
Three White Soldiers The three white soldiers consist of three green candles in a staggered upward formation. The appearance of the pattern during a bearish trend may indicate a potential reversal.
Identical Three Crows The converse of the three white soldiers, the identical three crows consist of three red candles in a staggered downward formation. The appearance of the pattern during a bullish trend may indicate a reversal.
There isn't a single 'most reliable' candlestick pattern, per se. The effectiveness and reliability of candlestick patterns depend on various factors like market conditions, volatility and time frame, among others.
That said, some candlestick patterns typically generate stronger signals than others, these include engulfing patterns, dojis, hammers and shooting stars. It is advisable to combine multiple candlestick patterns and technical analysis tools to get accurate predictions.
Although using candlestick stock screeners is a much faster and more efficient way to identify potential trading opportunities, as a trader, you need to know how to analyse candlestick patterns. Here's a quick overview of the step-by-step process you need to follow.
Step 1: Set a Time Frame The first step in candlestick pattern analysis is determining the time frame you wish to use. The time frame can be as short as a minute to as long as weeks and months. The patterns have different implications depending on the chosen time frame.
Step 2: Finalise Your Trading Strategy Once you've decided on the time frame, the next step is to determine the trading strategy you're going to use. Your strategy can either be scalping, which requires quick trade executions, or momentum trading, which is not as fast-paced.
Step 3: Identify Ongoing Trends Once you've finalised the strategy, determine the current trend of the asset. The ongoing trend can influence the type of patterns that may appear.
Step 4: Look Out for Patterns Keep a keen eye out for the various candlestick patterns. If the ongoing trend is bullish, look out for trend continuation and reversal patterns.
Step 5: Look for Confirmation If you've spotted a pattern, try to confirm the trend reversal or continuation with other technical indicators. This will reduce the chances of the market moving against your position.
Step 6: Place Trades Once you've gotten the confirmation, you can proceed to enter into your preferred position.
