TECHNICAL ANALYSIS ON INDIAN STOCK MARKET WITH THE HELP OF CANDLESTICK PATTERN: PATTERN DETECTION AND EFFICIENCY STATISTICS
1Mr. Mohit Raikwar, 2Ms. Sona Parani
1,2Assistant Professor, IMIRC, Indore
Abstract:- To determine the buy and sell time is one of the most important issues for investors in stock market. Technical analysis can be defined as the process of identifying trend reversal at an early stage and to ride the trend until the weight of evidence suggests that the trend has reversed directions. One of the financial market analyses is Candlestick Technical analysis also is known as Japanese candlestick charting. It is the oldest form of financial market analysis originated in Japan. This study measured the occurrence and tested the efficiency of various bullish and bearish price action using candlestick patterns on India‟s leading stock market benchmark index NIFTY 50 for the period April 2020 to April 2021.
Keywords: Technical Analysis, Candlesticks, market-timing and Indian stocks NIFTY 50.
1. INTRODUCTION
Stock market prediction is an important area of financial forecasting, which is of great interest to stock investors, stock traders and applied researchers. There are usually three types of trends found in the stock market. The Bullish trend indicates that next few sessions might show an up trend and values may move up. The Bearish trend indicates that next few sessions might show down trend and values may move down. The Neutral trend (Sideway trend) indicates that next few sessions might show values that would be in a range bounded around few points above and below the mid distance between highest and lowest values. This information is very useful to the intraday traders and short term traders who purchase and sell with in a time span of one day to a week. Candlestick chart patterns are one of the important types of technical analysis. A short-term prediction occurs by candlestick chart patterns for traders to make trade to buy or sell decisions.
The candlestick charting technique focuses on patterns among several days of candlesticks formulated by opening, high, low, and closing prices within a specific time frame, such as minute, hour, day or week.
1.1 Objectives of Research
To study the candlestick chart and technical indicators.
To analysis the effectiveness of bullish and bearish candlestick pattern on Indian stock market.
To analyze the price fluctuations in the Nifty 50 index.
To analyze the demand and supply using technical indicators.
To identify the market trend of Nifty 50 index.
1.2 Limitations of the Study
Technical analysis may not hold good always.
Open to interpretation (May two technical experts have different views due to time frames)
Technical analysis does not consider the economy of the country, performance of the company etc.
2. REVIEW OF LITERATURE 2.1 Tools used for analysis
The data collected are analyzed with the help of following tools;
• Charts and Candlestick Patterns
• Technical indicators;
Relative Strength Index (RSI)
Bollinger Band
Moving Average Convergence Divergence (MACD)
3. STUDY OF CHART AND CANDLESTICKS 3.1 A. Chart in Stock Market
A chart is a graphical representation of price and volume movements of a stock over a certain period of time. In the graphical chart, the X-axis represents the time period and the Y-axis represents the price movement.
Figure 1: A: Line Chart of Nifty 50. X-axis represents the time period and the Y-axis represents the price movement.
3.2 B. Top 3 Charts in Stock Market
Line chart
Bar Chart and Japanese Candlestick Chart
3.2.1 Line chart: A line chart is the most basic type of trading chart created through the connection of a series of data points with unbroken line(s). A line chart is a closing-price- only chart type. A time frame is still chosen, such as a 1-minute interval, but only the closing prices for those 1-minute intervals are recorded. Each closing price is connected to the next closing price via a single continuous line.
Figure 2: B: Line Chart of Nifty 50.
3.2.2 Candlesticks and bar charts: Candlestick graphs are similar to Bar charts (HLOC).
They are both technical analysis indicators, and they both require a certain understanding before traders can use them and learn from them effectively. The main difference is that a HLOC chart lays out the information without the use of the „body‟ of a candlestick.
Figure 3: C: Showing basic structure of bar chart and candles chart.
3.3 C. Candlestick
A candlestick is a way of displaying information about an asset‟s price movement.
Candlestick charts are one of the most popular components of technical analysis.
3.4 D. Candlestick has Three Basic Features
The body, which represents the open-to-close range.
The wick, or shadow, that indicates the intra-day high and low.
The colour, which reveals the direction of market movement – a green (or white) body indicates a price increase, while a red (or black) body shows a price decrease.
The Green (or white) candlesticks represent one time period where the stock increased in value.
The Red (or black) candlesticks represent a time period where the stock decreased in value.
The time period that each candle represents can be anything from a minute to an hour, to a day or even a month.
A candle for a particular time period is built using four prices: Open, High, Low and Close. If Close is higher than Open, it is a bullish candle (green). If Close is lower than the Open, the candle is bearish (red). Candlestick Formation is showing in below figure 4.
Figure 4: D: Formation of Candles with body, shadow and time period using four prices Open, High, Low and Close value.
3.5 D. Candlestick Patterns
There are various candlestick patterns used to determine price direction and momentum.
Candlestick patterns are used to predict the future direction of price movement.
Following are the different candlestick patterns used in technical analysis:
Single Candlestick Pattern
Double Candlestick Pattern
Triple Candlestick Pattern
There are various single, double and triple candlestick pattern formation shown in below figures according to bearish and bullish signals.
Figure 5: E: Single Candlestick Pattern
Figure 6: F: Double Candlestick Pattern
Figure 7: G: Triple Candlestick Pattern 3.6 Relative Strength Index
RSI was created by Welles Wilder, who also created ATR, Parabolic SAR and other well- known indicators. Like all oscillators, RSI offer indications of when a currency pair is overbought or oversold. RSI is an indicator that falls under the category of oscillators, and it's an especially simple indicator to use. RSI works well in range-bound markets, but it's limited value in trending or breakout markets. RSI essentially calculates the strength of all upward candles(green) against the strength of all downward candles (red) over the course of the desired time-frame. If RSI is above 70, the pair is indicate to be overbought. Some traders enter short at this level, but this will be dangerous because the price should be rising. Enter short when the RSI crosses back under 70, as this might indicate that the momentum has turned. If the RSI is below 30, the pair is indicate to be oversold; enter when RSI crosses back above 30. Like most oscillators, RSI works best when the market is range-bound – in other words, when the market is predicted to easily gravitate between an upper and lower level. In trending or momentum-driven markets, using the overbought/oversold levels offered by RSI is usually of limited value.RSI also can be accustomed signal when a trend is weakening. If a currency pair makes new highs in its price but RSI doesn't – meaning there's divergence between the value movement and RSI – it's going to signal that the trend isn't strong, which a reversal could also be imminent. If candlestick patterns confirm, a trader can use this as a chance to enter an edge.
3.7 Moving Average Convergence Divergence
MACD is a widely used technical indicator derived from exponential moving averages which will be utilized in both momentum and range bound markets. Like RSI it's an oscillator plotted at all-time low of the chart, and it shows the momentum of the market relative to its recent history. Parameters The MACD line is that the difference between the 12 and 26 day EMA. The signal line is that the 9 day EMA of the MACD. Visually, the MACD consists of three elements:
• MACD line: This is simply the difference between the 12 and 26 day EMA. It is a line plotted on the chart.
• Signal line: The signal line is the 9 day EMA of the MACD line. Like the MACD, it is a line plotted on the bottom of the chart.
• Histogram: The MACD histogram is simply a bar chart located at the bottom of the chart, where the MACD and signal lines are plotted. The histogram is simply a visual representation of the difference between the MACD and the signal line. The
“zero” point of the histogram – meaning the point where the bars cross above and below – is referred to as the centerline.
How to use it?
• Trade signal: When the MACD crosses the signal line, a trade signal is issued.
Traders can enter positions following the direction of the MACD.
• Overbought/oversold: No specific numbers indicate whether it is overbought or oversold, but if it is relatively far from its mean compared to its recent history, this may suggest that it is due for a reversion.
• Divergence: When the pair makes new highs/lows but the MACD does not, this suggests divergence, and that the trend may in fact be weakening with a reversal in store.
3.8 Bollinger Bands
Bollinger Bands are envelopes plotted at a typical deviation level above and below an easy moving average of the worth. Because the space of the bands is predicated on variance, they suits volatility swings within the underlying price. Bollinger Bands use 2 parameters, Period and Standard Deviations, StdDev. The default values are 20 for period, and a couple of for normal deviations, although you'll customize the combinations. Bollinger bands help determine whether prices are high or low on a relative basis. they're utilized in pairs, both upper and lower bands and in conjunction with a moving average. Further, the pair of bands isn't intended to be used on its own. Use the pair to verify signals given with other indicators.
How this indicator works
When the bands tighten during a period of low volatility, it raises the likelihood of a sharp price move in either direction. This may begin a trending move. Watch out for a false move in opposite direction which reverses before the proper trend begins.
When the bands separate by an unusual large amount, volatility increases and any existing trend may be ending.
Prices have a tendency to bounce within the bands' envelope, touching one band then moving to the other band. You can use these swings to help identify potential profit targets. For example, if a price bounces off the lower band and then crosses above the moving average, the upper band then becomes the profit target.
Price can exceed or hug a band envelope for prolonged periods during strong trends.
On divergence with a momentum oscillator, you may want to do additional research to determine if taking additional profits is appropriate for you.
A strong trend continuation can be expected when the price moves out of the bands.
However, if prices move immediately back inside the band, then the suggested strength is negated.
4. PROBLEM STATEMENT
To find whether candlestick patterns are useful in taking investment decisions by comparing its accuracy with technical indicators reference to Nifty index for the past one years. Identifying trends is important. But the major problem is how can spot a trend is difficult, as the market never moves in a straight line. A stock will never fall continuously on a given day and rise on another. "Generally, higher highs and higher lows indicate an uptrend, whereas lower highs and lower lows mean a downtrend”. To find the trends whether candlestick patterns are useful in taking investment decisions by comparing its accuracy with special candlestick pattern to analysis price behavior of the Nifty index for the period where the Indian equity market have witnessed several turbulences and exuberance due to pandemic situations.
5. RESEARCH METHODOLOGY 5.1 Data Collection
This paper is based on analytical research. The shares of companies which are indexed in NSE‟s NIFTY 50 is considered for analysis. The price quotes have gathered from the website of investing.com.
To achieve the identified objectives, the data has been collected relating to the price behavior of the Nifty index for the period from April 2020 to 2021 the period where the Indian equity market have witnessed several turbulences and exuberance due to pandemic situations.
Analysis is done on Nifty index based on the technical chart of special candlesticks pattern, To calculate the exact efficiency, our analysis has mainly focused when special bullish candlestick pattern identified after bearish trend and special bearish candlestick pattern identified after bullish trend with the confirmation of technical tools like Relative Strength Index (RSI),MACD and Bollinger Band.
5.2 Methodology
The collected EOD data Nifty index 50 are incorporated in the investing.com wesbite.
investing.com is a technical analysis web application to identify, explore and analyses candlestick patterns in financial market data. It has the capability of measuring efficiency and based on which trading strategies can be designed for further refinement and usage. By using the web application, the collected data are subjected for back testing to identify occurrences of (Table 1) different bullish reversal and bullish continuation patterns for one- day trading basis.
Table 1: List of Bullish Reversal and Bullish continuation Patterns observed in Nifty index for the period from April 2020 to 2021
S. No. Name of Pattern Signal
1 Bullish Doji Bullish
2 Bullish Hammer Bullish
3 Bullish Harami Bullish
4 Three White Soldiers Bullish
5 Piercing Line Bullish
6 Long White Candle Bullish
7 Inverted Hammer Bullish
8 Bearish Engulfing Bearish
9 Bearish Harami Bearish
10 Bearish Marubozu Bearish
11 Closing Bearish Marubozu Bearish
12 Doji (Bearish) Bearish
13 Engulfing Bearish Bearish
14 Gravestone Doji Bearish
15 Long Black Candle Bearish
16 Three Black Crows Bearish
6. RESULT AND ANALYSIS
The stock price data used is of the type daily or end of the day (EOD). In this Paper we have studied and Analysis the efficiency of following special pattern for the Nifty index from April 2020 to April 2021 for one year.
The following table is showing the information regarding the occurrence of bullish pattern for the last one years.
Table 2: Actual accuracy of bullish patterns
Name of
Pattern Number of
Occurrence Theoretical Outcome
Actual Outcome Accuracy Level Bearish Bullish
Bullish Doji 2 Bullish 0 2 100%
Bullish Hammer 2 Bullish 0 2 100%
Bullish Harami 3 Bullish 1 2 50%
Three White
Soldiers 2 Bullish 0 2 100%
Piercing Line 1 Bullish 0 1 100%
Long White 2 Bullish 0 2 100%
Candle Inverted Hammer
1 Bullish 1 0 0%
The following table showing the information regarding the occurrence of bearish pattern for the last one years.
Table 3: Actual accuracy of bearish patterns Name of Pattern
Number of Occurrence
Theoretical
Outcome Actual Outcome Accuracy Level Bearish Bullish
Bearish Engulfing 2 Bearish 2 0 100%
Bearish Harami 2 Bearish 2 0 100%
Bearish Marubozu
3 Bearish 1 2 33%
Closing Bearish Marubozu
1 Bearish 1 0 100%
Doji (Bearish) 1 Bearish 1 1 50%
Engulfing Bearish 2 Bearish 2 0 100%
Gravestone Doji 1 Bearish 1 0 50%
Long Black
Candle 3 Bearish 2 1 66%
Three Black
Crows 5 Bearish 5 0 100%
According to result analysis, studied of special candles formation given reliable result as shown in Figure 8 and Figure 9 for the nifty 50 index from April 2020 to April 2021. Lets See the Chart.
Figure 8: Analysis of Special Candles Formation from April 2020 to September 2020 on Nifty 50 Index
Figure 9: Analysis of Special Candles Formation from October 2020 to April 2021 on Nifty 50 Index
Result with the confirmation of Technical Tools - MACD, RSI and Bollinger Band show in table 4 and table 5.
Table 4: Bullish patterns with other technical indicators Name of Pattern
Number of
Occurrence of the Pattern
Number of Occurrence of Patterns with the Support of Technical Indicators
RSI MACD Bollinger Band
Bullish Doji 2 2 2 2
Bullish Hammer 2 1 1 2
Bullish Harami 3 2 1 2
Three White Soldiers 2 2 2 1
Piercing Line 1 1 1 1
Long White Candle 2 1 2 1
Inverted Hammer 1 0 1 1
Table 5: Bearish patterns with other technical indicators Name of Pattern
Number of
Occurrence of the Pattern
Number of Occurrence of Patterns with the Support of Technical Indicators
RSI MACD Bollinger Band
Bearish Engulfing 2 2 1 2
Bearish Harami 2 2 1 2
Bearish Marubozu 3 2 2 2
Closing Bearish Marubozu
1 1 1 1
Doji (Bearish) 1 1 1 1
Engulfing Bearish 2 2 1 2
Long Black Candle 3 2 2 2
Three Black Crows 5 4 3 4
6.1 Findings of the Study
Study of Candlestick Charts with technical indicators Bollinger Band, RSI and MACD.
Candlestick patterns are more than 75% accurate as per the past one year Nifty index.
Candlestick patterns are very much supported by technical indicators.
Among various candlestick patterns, only 10 patterns are identified.
Mentioned pattern are identified as the mostly occurred candlestick. Most of the pattern occurred very rarely.
Dark cloud cover pattern is the pattern which formed lowest number of times (one time).
Hammer pattern is the most accurate pattern among the 10 patterns (75%
accuracy).
Investors can trust candlestick patterns in their trading decisions. Because the accuracy level of the most accurate pattern is more than 75%
Investors should consider the other factors along with candlestick patterns. It helps to improve the accuracy level.
7. PROPOSED SOLUTION
Study of various Special Candlestick pattern in Nifty index and analysis that candlestick work most efficiently with the confirmation of next candle of special candle formation/pattern and with the confirmation of another technical tools indications like Bollinger Band and RSI. Investors must have deep knowledge about candlestick patterns and other technical indicators like Bollinger Band, RSI and MACD. Investors should consider other confirmation factors which affecting the market movements. Investors need to be wait for the formation of special candlestick patterns. Because the past one year study of Nifty index shows that number of occurrence of candlestick patterns is very large and trade has successful with the confirmation of other confirmation factors
8. CONCLUSION
The present study had done with the technical analysis of Nifty index using the technical chart and technical tools RSI and Bollinger Band. From the study it is found that between the Covid Pandemic the Nifty index provided short term investment gain to its investors. It also found that the market trend of Nifty index tends up with gradual price fluctuation. It is concluded that investors can invest in the Nifty share stocks in future also with the consideration of country‟s economic scenario and the short term investors can rely on the technical charts for their investment decisions. Technical charts hold goods for short term movement then for the long term investment decisions.
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