What are candlestick charts?
Candlesticks charts are used to analyze and gain information on movements of the price of certain assets, such as forex, stocks, and cryptocurrencies. These types of charts provide a visual representation of the price of an asset over a specific time and can help identify potential buying and selling opportunities.
The first use of a candlestick chart was in the 18th century in Japan. Rice trader Homma discovered that he could get a physiological view of the market, based on tracking the open and close prices of a security, as well as the highest and lowest prices it reached in a trading period. This discovery helped him gain more information for trading decisions and he started developing systems for using these types of charts.
Candlestick Components
Candlesticks consist of several components, which are the real body, upper shadow, and lower shadow (wicks). Each of them provides traders with information about the potential movement of the price of a security or asset, and later on, help them identify a signal for an entry into the market. They also help get an insight into the emotions and psychology of the markets.
The Real body
The thickest part of the candle is called the real body and it represents the range between the opening and closing price. The length can also provide information about the strength of the price movement. A long real body indicates a strong price movement, while a short one – a weak price movement.
Upper And Lower Shadows (Wicks)
The upper shadow and lower shadow are also known as wicks or tails. They represent the lowest and highest points that the price has been during a trading period. Their length can provide volatility information. Long shadows indicate big volatility and vice versa. What they specifically show is the support and resistance of the asset’s trading value. If the wick is longer at the top, it indicates that there is a high-level resistance there, and if the wick is longer at the bottom, it can be read as there is high-level support.
What do candlesticks tell us?
The most common way candles can be read is by analyzing the direction of the market. If the closing price is higher than the opening one, that can be considered bullish. If the opening price is lower than the previous one, the price might be decreasing and be in a bearish indicator. These types of charts can also identify support and resistance to a price movement, as well as the strength of the asset. Understanding what candles can tell us can be an important tool for making informed trading decisions.
Basic Candlestick Patterns
First of all, let’s explain what basic candlesticks patterns are. These are visual representations of the price movement and they also help read the market differently from the basic principles of candles. One thing they can specifically do is show potential reversal of the market, which is useful when it comes to gathering information.
Hammer Pattern
One of the most used patterns is the hammer pattern. It is formed when the real body of the candles is at the top of the range. The long lower shadow indicates that the security or asset was “pushed down” during the period of trading, but in the end closed near the opening price, which can be read as a potential bullish reversal. At first, the bears beat the bulls, but bulls have gathered momentum to perhaps turn the price up.
Bullish Engulfing
Another well-known pattern is the bullish engulfing pattern. It is formed when a small real body is followed by a large real body that sort of engulfs the previous candlestick. This pattern shows that the bulls have taken control of the market and a bullish reversal is likely.
Bearish Engulfing
This pattern is the opposite of the bullish engulfing pattern. The bearish engulfing candle is formed when a small real body is followed by a large real body that again engulfs the previous candle. This pattern indicates that the bears are in control and the bearish reversal is to be expected.
Doji
The doji pattern is another commonly used one. It indicates a potential reversal when the opening and closing prices are the same or very close. This shows that there was little price movement and it might lead to a trend reversal.