A candlestick is a type of price chart used in technical analysis that displays the high, low, open, and closing prices of a security for a specific period. It originated from Japanese rice merchants and traders to track market prices and daily momentum hundreds of years before becoming popularized in the United States. The wide part of the candlestick is called the "real body" and tells investors whether the closing price was higher or lower than the opening price (black/red if the stock closed lower, white/green if the stock closed higher).
Key Takeaways
Candlestick charts display the high, low, open, and closing prices of a security for a specific period.
Candlesticks originated from Japanese rice merchants and traders to track market prices and daily momentum hundreds of years before becoming popularized in the United States.
Candlesticks can be used by traders looking for chart patterns.
The Basics Of A Candlestick
The candlestick's shadows show the day's high and low and how they compare to the open and close. A candlestick's shape varies based on the relationship between the day's high, low, opening and closing prices.
Candlesticks reflect the impact of investor sentiment on security prices and are used by technical analysts to determine when to enter and exit trades. Candlestick charting is based on a technique developed in Japan in the 1700s for tracking the price of rice. Candlesticks are a suitable technique for trading any liquid financial asset such as stocks, foreign exchange and futures.
Long white/green candlesticks indicate there is strong buying pressure; this typically indicates price is bullish. However, they should be looked at in the context of the market structure as opposed to individually. For example, a long white candle is likely to have more significance if it forms at a major price support level. Long black/red candlesticks indicate there is significant selling pressure. This suggests the price is bearish. A common bullish candlestick reversal pattern, referred to as a hammer, forms when price moves substantially lower after the open, then rallies to close near the high. The equivalent bearish candlestick is known as a hanging man. These candlesticks have a similar appearance to a square lollipop, and are often used by traders attempting to pick a top or bottom in a market.
Traders can use candlestick signals to analyze any and all periods of trading including daily or hourly cycles—even for minute-long cycles of the trading day.
Two-Day Candlestick Trading Patterns
There are many short-term trading strategies based on candlestick patterns. The engulfing pattern suggests a potential trend reversal; the first candlestick has a small body that is completely engulfed by the second candlestick. It is referred to as a bullish engulfing pattern when it appears at the end of a downtrend, and a bearish engulfing pattern at the conclusion of an uptrend. The harami is a reversal pattern where the second candlestick is entirely contained within the first candlestick and is opposite in color. In a related pattern, the harami cross has a second candlestick that is a doji; when the open and close are effectively equal.
Three-Day Candlestick Trading Patterns
An evening star is a bearish reversal pattern where the first candlestick continues the uptrend. The second candlestick gaps up and has a narrow body. The third candlestick closes below the midpoint of the first candlestick. A morning star is a bullish reversal pattern where the first candlestick is long and black/red-bodied, followed by short candlestick that has gapped lower; it is completed by a long-bodied white/green candlestick that closes above the midpoint of the first candlestick.
A candlestick chart is a financial chart that typically shows price movements of currency, securities, or derivatives. It looks like a candlestick with a vertical rectangle and a wick at the top and bottom. The top and bottom of the candlestick show open and closed prices.
The candlestick's shadows show the day's high and low and how they compare to the open and close. A candlestick's shape varies based on the relationship between the day's high, low, opening and closing prices.
The candlestick represents information about the price action. For example, a red candle or black candlestick means the bears are dominating at the specified time. A green candle or white candlestick means that the bulls control the market. There are also Doji candlesticks that mean market uncertainty.
It consists of three successive candlesticks – the first is long and bearish and is followed by a smaller bullish bar that is completely engulfed by the first one. The third candle is bullish and closes above the second candle's high, suggesting a potential shift from a downtrend to an uptrend.
Understanding this trading chart is simple, if the left dash (which is open price) is lower than the right dash (closing price) then the bar will be shaded in green, black or blue and represents a price increase and the instrument gained in value.
A black or filled candlestick means the closing price for the period was less than the opening price; hence, it is bearish and indicates selling pressure. Meanwhile, a white or hollow candlestick means that the closing price was greater than the opening price. This is bullish and shows buying pressure.
The body, which represents the open-to-close range.
The wick, or shadow, that indicates the intra-day high and low.
The color, 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.
Similar to the green hammer candlestick, the red or bearish hammer candlestick serves as a bullish signal. It shows that the buyers could absorb the selling pressure but could not drive up the asset's price past the opening price.
If a candlestick has no wicks (shadows) this means that the security in question traded between its open and close prices for the entirety of the day (or period in question). A candle with no shadows may indicate strong market sentiment in whatever direction the candle is going (up if green, down if red).
The candlestick forms when prices gap higher on the open, advance during the session, and close well off their highs. The resulting candlestick has a long upper shadow and small black or white body. After a large advance (the upper shadow), the ability of the bears to force prices down raises the yellow flag.
An engulfing line is a strong indicator of a directional change. A bearish engulfing line is a reversal pattern after an uptrend. The key is that the second candle's body “engulfs” the prior day's body in the opposite direction.
Which Candlestick Pattern is Most Reliable? Many patterns are preferred and deemed the most reliable by different traders. Some of the most popular are: bullish/bearish engulfing lines; bullish/bearish long-legged doji; and bullish/bearish abandoned baby top and bottom.
The area between the opening and closing prices is called the body. The color of a candlestick body indicates a bullish or bearish price movement. If the opening price is lower than the closing price, the body color is green .Conversely, if the opening price is lower than the closing price, the body color is red .
Introduction: My name is Fr. Dewey Fisher, I am a powerful, open, faithful, combative, spotless, faithful, fair person who loves writing and wants to share my knowledge and understanding with you.
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