Candlestick charts are technical tools traders use to analyze market price movements. Although they look similar to the bar chart, candlesticks are quite different from traditional open high and low close bars. It is compact and can combine multiple data from different times frames into one candlestick bar.
Japan is the origin of candlestick charts. Japanese rice traders used colour-coded candles to predict the price movements of rice in the market. This was during the 18th century. In the 90s Steve Nison introduced candlestick patterns in the west and they were used for technical trading. To predict market movements, traders around the world now recognize several candlestick patterns.
The uniqueness of candlestick formations is as impressive as their names, such as Bullish Harami or Bearish Harami and Dark Cloud Cover, Three Black Crows, Three White Soldiers, Three Black Crows, Three White Soldiers and many more. These formations can be used to determine long-term and short-term trading strategies based on their patterns and the location they form within a trendline.
- Candlestick patterns have been used for centuries to accurately predict market price movements.
Modern traders recognize many candlestick patterns as a way to gauge market movements
- Trading strategies based on candlestick patterns must be compatible with other trading charts
Doji patterns indicate market uncertainty and trend change. Therefore, traders should confirm the change before establishing trading strategies.
Candlestick charts are different from day trading charts. Why then do traders use candlestick charts? Candlestick formations are preferred by traders because they provide a visual representation of price. To interpret trading signals, it is important to know the essential components of a candle.
Each candle is part of a candlestick chart. These candles provide traders with a visual representation for price movement. They allow traders to identify the opening and closing times of prices, as well as the highest and lowest price points. Unusual candle formations can shed light on market momentum and help predict a change in trend.
To understand a candlestick chart you need to be familiar with the components of each candle. We mentioned at the beginning that candles can be coloured coded to aid in understanding. A bullish candle is typically green or white and a bearish candle can be either red or black.
A candle has a rectangular body that denotes the open and close prices of the day. It also contains shadows and wicks which indicate the highest and lowest prices during the trading period. The following information is provided by a candle to traders.
- Visually see where stocks have opened and closed, and compare it to previous data points
- The candle's colour helps identify the direction in which the market is heading
The range is the highest and lowest points of the candle. The resistance and support levels are determined by the highest and lowest points on the wicks.
Candle patterns have two advantages over bar charts. Bar charts are not visual and bar diagrams can be difficult to understand the market's movements. With a compact representation, candle patterns can solve this problem.
Commonly Formed Candlestick Patterns
Candlesticks can be recognized by traders in many different ways. Among these, however, there are some that are more powerful than others. These patterns are essential for anyone who is interested in technical trading.
A candlestick is a single bar. It has a body with shadows at each end. This depicts the opening, closing, high, low and close of the market. A pattern is formed when two or more candlesticks are joined together. This indicates a bullish or bearish trend reverse.
Let's look at some different candlestick patterns. There are both bullish and bearish patterns as well as unique formations.
Bullish candlesticks signal the end of a downtrend, and traders should enter a long position. Bullish patterns are marked in green on the chart if the closing price is greater than the opening price. The strength of the trend reversal signal depends on the position of the formation along the trendline. Long-real bodies that close near the high indicate strong price movements in areas where buyers were strong. Trader's must also consider candlestick that was formed before the bullish candle appeared to confirm a trend reversal. They look for weak downward candles that lead to the formation a bullish candle and base their strategy after the confirmation candle has been formed. These are some bullish candle formations.
- Bullish Hammer
- Three white soldiers
- Dark cloud cover
- Abandoned baby
- Bullish engulfing
- Bullish belt hold
- Bullish harami
Where can you find bullish candle patterns and where to look? In a downtrend, bullish trend reversals occur. It is not a trend-reversal unless it occurs in a downtrend.
Most bullish reversal formations require confirmation. A candle must usually appear in the uptrend to confirm the bullish candle's trend reversal. Confirmation candles should appear within three days after the formation of the bullish candle.
The trend reversal chart must be in line with other charts such as momentum oscillator, trendlines, volume indicators, and trendlines.
In an uptrend, bearish candlesticks are common. This indicates a shift in market sentiment from selling to buying. When they see bearish patterns in an uptrend, traders prepare to enter a position short. Bearish candles are formed with real-body, upper and lower shadows. The lower shadow is usually longer, indicating that the market fished for the lower bottom and that selling strengths were high. Strong selling force can cause the closing to be lower than the opening.
For easy identification, bearish candles are colored red. Trader wait for the bearish pattern to reverse before they take a position. Bearish patterns may not be equally enforced. Therefore, traders should confirm any trend change on other charts before they adjust their positions. There are a few things you should keep in mind.
The real-body - A clear formation of the real body indicates strong market sentiment. It eliminates any chance of a retrace. This confirms that bearish forces were stronger than those of bullish forces, and could end the buying spree.
Bearish candles closing connects to the downward shadow, which means that selling forces are in control of the market.
The position of the candle- A bearish reversal candle forms during an uptrend. It usually forms after a weak bullish trend. It is important that traders verify that it is a reversal signal, and not a temporary reconciliation before continuing the current trend. They wait for confirmation candles to appear after a bearish pattern has been formed.
The gap between the confirmation and bearish candles is an important indicator. A larger gap is a sign of a trend reversal prediction.
These are some popular bearish candle designs:
- Bearish hanging man
- Three black crows
- Bearish belt hold
- Bearish Engulfing
- Bearish harami
- Bearish dark cloud cover
Doji is a collection of candlestick patterns that are not standard in candlestick charts. Doji means that the candlestick's opening and closing values are almost identical. These candles may indicate market uncertainty or trend reversals. Doji could indicate, depending on the size of the shadows, that both selling and buying forces were present in the market but were not strong enough to provide direction. Therefore, closing and opening are nearly the same. Doji formations are unique just like their appearances.
- Doji Star
- Gravestone Doji
Doji are a rare commodity, so they can't be used to make trading decisions. Doji pattern, the size of the wicks and their location in the trading chart all play a significant role. Doji is often associated to market indecision. It is therefore not a guarantee that the current trend will change or continue.
Candlestick patterns give traders strong market insight regarding asset price movements. These patterns capture price movements in different time frames for each candle. They show the opening, closing and low prices for a day. Popularity of candles can often outweigh the reliability issue. Traders can overcome this problem by using technical tools that are linked to candlestick patterns. To be able to capitalize on opportunities and stay on top of asset prices movements, day traders must identify and interpret key candlestick patterns.