Table of Contents
Candlestick Chart: Introduction
To be a pro stock marketer, you will need to learn a few tactics, and here we have listed them with a great explanation. First of all, I will discuss the candlestick chart and then its pattern.
A candlestick chart represents the price movement of a stock over a certain time. As this type of chart is effortless to read and understand, it is quite popular among stock traders. In the 1700s, Homma, a Japanese national, discovered a relation between the “supply and demand” and the price of rice that later helped make the candlestick chart. After more than 100 years in western countries, the bar and point-and-figure charts were developed. It is done to simplify the study of stock trading.
Candlestick Chart: Analysis
Traders use a candlestick chart to determine the possible price movement based on its past patterns. Like a bar chart, a candlestick shows the four price points, such as the “open, close, high, and low”, throughout the period of time a trader specifies. Nevertheless, a candlestick consists of a wide part called the “real body” and “wicks”, which are the thin lines extending above and below the body.
This chart includes the open, close, high, and low stock prices over a specific timeframe. Anyway, for more simplification, take a time frame of 10 minutes. So, after the completion of 10 mins, a new candlestick will be formed, and it will go on. But remember that the time frame is not fixed, and it is selected as per the trader’s convenience as well as requirement. Above all, the trader will be able to see the four major price movements of the stock over a particular timeframe through the candlestick chart.
As per the above figure –
- A green candlestick will be formed if the closing price or “close” is above the opening price or “open” for a specific day at trading.
- But if the closing price or “close” is below the opening price or “open”, then a red candlestick will be formed.
- The space between the open and close points is represented as the “Body”.
- The highest trade price for this 10 min timeline is represented as “high” and called a wick, shown as a vertical line.
- The lowest trade price for this 10 min timeline is represented as “low” and called a wick or tail.
Candlestick Chart: Conclusion
It is crucial to remember that you should not observe the candlesticks separately but with the past patterns. Suppose you want to trade in stock within a time frame of 10 mins, then observe a few past patterns having a timeline of 10 mins, 5 mins, 2 mins, and if you wish, you can select further. It will help you understand how the previous price has changed and let you catch the trend. Moreover, you have to ask yourself a few questions. Has the candlestick body become larger or smaller? How have the wicks changed? It is done because if the candlestick body becomes larger, then it suggests an increment in momentum and shows how much the price of that particular stock has changed over that specific timeline.
Now, as you have known about the candlestick chart, we will go further. As by the ups and downs in prices of the stocks, various types of candlesticks are formed. We will explain all the candlestick patterns and what these signify. By studying them thoroughly, you can understand what pattern will be more useful and profitable in different situations. There are generally 7 different types of candlestick formed due to the movement in prices of a stock. If you really want to gain profits, you must understand these formations. Let’s get started.
The bullish engulfing pattern is formed of two candlesticks. The first candle consists of a short red body that is completely engulfed by a larger green candle. But this type of pattern is more likely to signal reversals when they are preceded by four or more red candlesticks. When you invest your money, make sure not to look only to two candlesticks that form the bullish engulfing pattern but also to the preceding candlesticks. In reality, when buyers are more than sellers, a bullish pattern takes place. Besides, the bulls having established some control, the price could increase.
A bearish engulfing pattern occurs when sellers are more than the buyers at the end of an uptrend. It is also formed with two candlesticks. The first candle has a small green body that is engulfed by a subsequent long red candle. This pattern signifies that sellers are back in control and that the price could continue to decline.
The hammer candlestick pattern is formed of a short body with a long lower wick or tail that is at least two or more times the size of the body. It occurs when the sellers enter the market during a price decline. But by the market closing time, buyers absorb selling pressure and push the market price near the opening price. At the same time, the close may be above or below the opening price, even though the closing price should be near the opening price to keep the real body of the candlestick remains small. Nevertheless, the colour of the body can vary, but green hammers show a stronger bull market than red hammers.
Shooting Star / Inverse Candlestick
Shooting Star candles are the opposite of hammer, also often referred to as an inverse hammer, suggesting a potential price top. This type of candlestick is a bearish candlestick with a long upper wick, little or no lower wick, and a small real body near the low of the day. Simply, a shooting star is a type of candlestick that forms when a security opens, increases significantly, but then closes the day near the opening price again. Furthermore, the distance between the highest price of the day and the opening price must be more than twice as large as the shooting star’s body. In addition, there should be little to no tail below the real body.
A Doji candlestick does not signify much on its own. To get a clear conception of this pattern, traders examine the previous price action building up the Doji. It mainly looks like a cross, inverted cross or plus sign. In addition, a Doji candlestick is formed when the open and close prices are virtually equal for the given time period. In Japanese, “Doji” means blunder or mistake, referring to the rare case in which the open and close prices are exactly the same.
A Dragonfly Doji is a candlestick pattern that can signal a potential reversal in price to the downside or upside, depending on the past price action. It is constructed when a stock’s high, open, and close prices are the same. The long lower wick indicates that there was enormous selling during the candle period. But as the closing price ends near the opening price, it displays that buyers were able to tackle the selling pressures and push the price back up.
A Gravestone Doji is a bearish reversal candlestick pattern formed when the open, low, and closing prices are all near each other with a long upper wick. Overall, the long upper tail represents that the bulls were able to advance at the beginning of the session but were overpowered by the bears at the end of the session, which often comes just before a bearish downward trend.
Candlestick Pattern: Conclusion
The candlestick’s pattern for analysing the market is entirely based on the formations of the candles made by the movement of prices in a stock. Each design of the candles has its own meaning, and they provide essential information about the upcoming trends of the stock. As a result, you, being a trader, can simply interpret the right timing to buy or sell stocks.