Introduction:

Intraday trading can be a tricky affair, specifically for those who are new to the stock markets. Also known as day trading, intraday trading involves buying and selling securities within the same trading day. Intraday traders aim to either buy shares at a low price and sell them at a higher price or short-sell shares at a high price and buy them back at a lower price, all within the same trading day.

However, successful intraday trading requires a keen understanding of market movements and patterns. One of the most effective tools for intraday trading is candlestick charts. They provide visual representations of price movements in stocks that can help traders make informed decisions.

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In this blog, you will delve into how to read candlestick charts and use them effectively for intraday trading. Keep reading.

What is a candlestick chart?

Before you delve into how to read candlestick charts, you must know what they are. A candlestick chart is a type of financial chart used to represent price movements in stocks over specific periods. Each candlestick provides four key pieces of information: the opening price, the closing price, the highest price, and the lowest price within that period.

The key components of a candlestick chart include:

1. The Body

The body of the candlestick represents the range between the opening and closing prices. If the closing price is above the opening price, the body is typically coloured green or white, indicating a bullish movement. Conversely, if the closing price is below the opening price, the body is coloured red or black, indicating a bearish movement.

2. The Wick (or Shadow)

Wicks or shadows are the lines extending above and below the body. The upper wick represents the highest price during the trading period, while the lower wick indicates the lowest price during the same trading period.

3. The Ends

The ends of the body show the opening and closing prices. For a bullish candle, the lower end of the body marks the opening price, and the upper end marks the closing price. For a bearish candle, it's the opposite.

Common candlestick patterns

You may notice two candlestick patterns on a candlestick chart – bullish and bearish patterns. Below are some common candlestick patterns you may come across:

• Doji

A Doji is one of the most common candlestick patterns. It has a very small body, indicating indecision in the market. It occurs when the opening and closing prices are almost equal. A Doji can signal a potential trend reversal, especially after a strong uptrend or downtrend.

• Hammer and hanging man

A hammer is a bullish candlestick pattern whereas a hanging man is a bearish pattern. A hammer occurs at the bottom of a downtrend and signals a potential reversal upwards, while a hanging man appears at the top of an uptrend, indicating a potential reversal downwards. Small bodies and long wicks characterise them.

• Engulfing patterns

A bullish engulfing pattern occurs when a small red candlestick is followed by a larger green candlestick that completely engulfs the red one. This suggests a strong bullish reversal. Conversely, a bearish engulfing pattern involves a small green candlestick followed by a larger red candlestick, indicating a bearish reversal.

• Morning star and evening star

A morning star pattern is a bullish reversal pattern that appears at the bottom of a downtrend. It consists of a large red candlestick, a small-bodied candlestick (which can be either colour), and a large green candlestick. An evening star is its bearish counterpart, appearing at the top of an uptrend.

Steps to apply candlestick patterns in intraday trading

You can use the candlestick patterns in intraday trading in the steps mentioned below:

1. Look for patterns that confirm the current trend or signal a reversal or continuation

2. Confirm candlestick patterns with other technical indicators, such as moving averages, support, resistance, etc.

3.  Set optimal entry and exit points

4.  Apply stop loss to minimise losses

To conclude

Candlestick charts are a powerful tool for intraday traders. They offer insights into market psychology and price movements. By mastering candlestick patterns and integrating them with other technical analysis tools, you can enhance your ability to make informed trading decisions and manage risks effectively.

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