Basic understanding of candlestick charts
Under technical analysis, candlestick charts are one of the most efficient ways to analyze changes in the prices of a security.
One reason for the popularity of candlestick charts is that they are more attractive than bar and line charts.
For a trader, the two most preferred characteristics of candlestick charts are:
Each candlestick represents the completion of a specific number of trades during a particular period.
It also shows whether there was more selling pressure or buying pressure during that particular period.
In this blog, we will discuss in detail about candlestick charts and how to analyze them:
Origin of candlesticks chart:
The Japanese candlestick chart is the oldest type of charting technique used to analyze future price movements.
In the 1700s, early forms of candlestick charts were used to forecast rice prices.
In 1750, a Japanese trader by the name of Munehisa Homa began to use his candlestick analysis to trade in rice exchanges in Sakata.
Creation of Candlestick Chart:
Each candlestick is primarily made up of the real body and wicks also known as shadows or tails:
Interpreting Patterns on Candlestick Charts:
As candlesticks become more attractive, the trader looks for candlestick patterns that may be continuation or reversal.
These candlestick patterns can also be classified into bearish and bullish candlestick patterns.
The candlestick pattern can be a single candlestick pattern or can be formed by combining two-three candlesticks.
Some examples of such candlestick patterns are:
Example of a single candlestick pattern:
- marubozu
- doji
- spinning tops
- hammer
- hanging man
- a shooting star
- Many candlestick patterns are formed by multiple candles.
Example of multiple candlestick patterns:
angling pattern
o Bullish Engulfing
o Bearish Angling
Loser
o Bullish Harami
o Bearish Harami
- piercing pattern
- dark cloud cover
- morning star
- evening star
Three Assessments When Analyzing Candlestick Charts:
- One should buy strength and sell weakness:
Strength is usually represented by a bullish (green) candle while weakness is indicated by a bearish (red) candle.
Generally one should buy on the day of green candle and sell on the day of red candle.
- One has to be flexible with the pattern:
There may be slight variations in the pattern due to market conditions.
Therefore, one should be a little flexible while analyzing these candlestick patterns on the chart.
- One should look for prior trend:
If you are looking for a bullish candlestick pattern then the former trend should be bearish and similarly, if you are looking for a bearish pattern then the former trend should be bullish.
Important Lessons:
Candlestick charts are a type of technical chart that analyze price movements similar to a bar chart or line chart.
Each candlestick is primarily composed of the actual body and wicks also known as shadows or tails:
The asset’s opening price > closing price = will be at the top of the open candlestick body.
The asset’s closing price > opening price = close will be at the top of the candlestick body.
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As candlesticks become more attractive, the trader looks for candlestick patterns that may be continuation or reversal.