Technical Analysis: Chart Patterns (Using Excel)

Chart Patterns have been widely used by technical analysts to examine current movements and forecast future market movements. Technical analysts use chart patterns to plot the price movements over specific time frames. A complete picture of the stock’s price history can be drawn by plotting the chart. It can also depict the history of the volume of trading in a stock.

The price patterns that are formed on the chart prove to be valuable indicators to anticipate the future direction of a security’s price. There are different types of charts found in technical analysis, but the most commonly used are the candlestick chart patterns.

What is a Candlestick?

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A candlestick is a convenient means to display the open, high, low, and closing prices of a stock in a specific period of time that is on a 15-minute chart, one candlestick represents 15 minutes. On a 1-day chart, one candlestick represents 1 day. Candlestick chart most widely used in technical analysis. The body of the candle is the hollow or filled portion. The highs and lows are depicted by the long thin lines called the shadow. 

When the stock closes higher than its opening price, a hollow candlestick is drawn where the opening price is represented with the bottom of the body, and the top of the body represents the closing price. A filled or black candlestick is drawn when the stock closes lower than its opening price, where the top of the body represents the opening price, and the bottom of the body represents the closing price.

Candlestick Patterns

Candlestick charts can often help to read the emotions that dictate the trading. These patterns help traders to determine possible price movement based on past patterns. There are plenty of patterns and chart formations in technical analysis. However, these can be distinguished into four major categories: bullish or bearish and continuation or reversal. Let’s look at some of them in detail.

Bullish Patterns

1. Bullish engulfing

Source: https://in.pinterest.com/pin/724727765020631772/

It is formed when a small black candlestick is followed by a large white candlestick that completely eclipses or engulfs the previous candlestick’s body. The psychology behind this trend is that after a decline, the price opens at a lower level, and the buyers have taken over, altering the emotions of the previous trend.

2. Bullish Harami

Source: https://www.moneycontrol.com/technicals/news/candlestick-patterns/bullish-harami-bullish-reversal-pattern_580514.html

It is a chart pattern in which a large candlestick is followed by a smaller candlestick whose body is located within the vertical range of the larger body. It signifies a small increase in price that has been in effect after a strong down-trend and a selling day. It opens at a price higher than the previous close. 

3. Morning Star

Source: https://hitandruncandlesticks.com/morning-star-candlestick-pattern/

A bullish pattern is formed by a tall black body candle, a second candle with a petite body that gaps below the first body to form a star, and a third white candle that closes well into the first session’s black body. Its name indicates that it foresees higher prices. The Morning Star is a bottom reversal signal. Like the planet Mercury, the morning star signifies brighter things – that is, sunrise is about to occur, or the prices will go higher. 

Bearish Patterns

1. Bearish engulfing

^{Source: https://hitandruncandlesticks.com/bearish-engulfing-pattern/} 

A bearish engulfing pattern signals lower prices to come. It consists of a white candlestick followed by a large black candlestick that eclipses or engulfs the smaller black candle.

2. Bearish Harami

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^{Source: https://www.moneycontrol.com/technicals/news/candlestick-patterns/bearish-harami-bearish-reversal-pattern_580515.html} 

It is a chart pattern in which a large candlestick is followed by a smaller candlestick whose body is located within the vertical range of the larger body. It signifies a small decrease in price that has been in effect after a strong up-trend and a buying day. It opens at a price lower than the previous close. 

3. Evening Star

^{Source: https://hitandruncandlesticks.com/evening-star-candlestick-pattern/} 

This pattern occurs at the top of an uptrend. It is a bearish pattern formed usually by three candles: a tall white body candle, a second white candle with a petite body that gaps above the first body to form a “star,” and a third black candle that closes well into the first session’s white body.

Continuation Patterns

Continuation patterns are indication traders signal a price trend that is likely to remain in play. These patterns indicate that the trend will be most likely to continue once a pattern has completed and they occur in the middle of a trend and signal that the trend is going to continue.

1. Triangles

Source: https://www.shutterstock.com/search/ascending+triangle

Triangles can be depicted by drawing trend lines along a converging price range. The upper and lower trendlines are formed by connecting the highs and lows, respectively. It usually occurs mid-trend and is a consolidation pattern. A breakout in the direction of the previous trend can be seen as a signal to enter a trade.

2. Rectangles

It is formed as a trading range during a pause in the trend. When the price reaches the same support and resistance lines multiple times, a rectangle is formed. The two parallel lines that make up the top and bottom of a rectangle are connected to the highs and lows. 

Reversal Pattern

1. Head and Shoulders 

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Head and shoulders is known to be one of the most reliable reversal patterns. Three successive rallies and reactions are portrayed in the head and shoulders pattern, with the second one making the highest/lowest point. It can be a bearish or bullish trend reversal and is one of the most common reversal formations. A head and shoulders bottom is an inverse head and shoulders that helps to predict downtrends.

2. Double tops and double bottom

These are two of the most familiar reversal patterns in technical analysis. The double top is indicated by the letter “M” On the contrary, the double bottom resembles a “W” formation; in reverse of the double top.

A double top is a reversal pattern which occurs following an extended uptrend. This name is given to the pair of peaks which is formed when price is unable to reach a new high. It is desirable to sell when the price breaks below the reaction low that is formed between the two peaks.

Double bottom is used to describe a drop in the value of a stock (or index), a bounce back up, and then another drop to the similar level as the previous low and finally another rebound. A double bottom is a reversal pattern which occurs following an extended downtrend. The buy signal is when price breaks above the reaction high which is formed between the two lows.

Identifying Patterns for Stocks (Using MarketXLS)

MarketXLS is a handy tool to calculate more than 120 Technical Indicators with a few clicks in Excel. You can scan your data for Candlestick Patterns, Perform Technical Analysis, and run groups of indicators on your data in Excel.

MarketXLS allows you to customize everything, including time period, Moving Average types, etc., and has the option to run with default inputs without prompting.

You can discover patterns in your data and analyze its impacts. 

Step by Step Using MarketXLS To Identify Candlestick Patterns

1. To identify candlestick patterns we first need to get the data of the stock. Here we just need to add the ticker in any cell and select custom dates and get the historical data.

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2. You will be prompted to select the dates for the period you want the data.

3. Once you have the data generated you can generate your candlestick charts by selecting the charts option> Candlestick charts

4. Now enter the data as per the requirement i.e Date values, Open High Low Close in the same sequence and the Volume data.

5. The candlestick chart is generated. Charts can be maximized to full screen and they automatically adjust dates etc depending on size of the area.

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6. Now, let’s try adding a chart pattern on the candlestick chart. So we first select any chart pattern we want to look for, here we’ve selected the engulfing pattern. As we did for generating the candlestick it will again prompt us to add the open high low and close. 

7. A pattern series will be generated. This pattern series only has binary data. That means if the pattern value is 0 it means there is no pattern and if it is 100 or -100 it means there is a pattern.
8. To view the engulfing pattern, you need to right click on the chart area and select add series. Select the entire range of the binary pattern series. Once done, you will be able to see the pattern in your candlestick chart.

You can also right click on the chart to add any number series and annotate patterns on the candlestick charts. MarketXLS will prompt you to select series with annotations and patterns.

To know more about creating candlestick charts in excel check out this video: MarketXLS Charts – Candlestick Charts – Stock Research Tool

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