Next one up, candlestick charts!
The most popular and widely used type of chart used amongst stock traders that practice technical analysis,
Candlestick charts (also often referred to as Japanese candlestick charts) are one of the most popular types of charts used amongst stock traders that display the high, low, open, and closing prices for a pre-determined time period.
Now, if you’re thinking this sounds familiar then yes they are a lot like bar charts.
In fact, many traders refer to them as an upgraded variation of bar charts.
Just take a look at them side by side!
Think of it as your non-identical twin brother. You look a bit like each other, but you’re obviously the better-looking one.
In this case, you would be the candlestick and your not-so-good-looking brother would be the Bar chart.
And whilst both chart types show the same price information, candlesticks are presented in a more appealing format.
Now, of course it’s not just the fact that Candlesticks look better.
Stock traders also prefer this type of chart because it is more reliable and easier to interpret.
(Japanese) candlesticks are composed of three parts:
Below is a picture of what they actually look like.
Now, let’s talk a bit more about their bodies.
Creepy, I know.
The candlestick bodies, also called real bodies, represent the price range between the open and close of that trading day.
When their bodies are black (or for those who prefer trading in colour, red), it means the close was lower than the open.
If the real body is empty (or green), it means the close was higher than the open.
Now, not only can their bodies be different colours, but candlesticks also come in many different body sizes.
Long bodies indicate strong buying or selling activities. The longer the bodies, the more intense the buying or selling pressure. This means that either buyers or sellers were stronger and took control.
On the other hand, short bodies imply very little buying or selling activity. The shorter the bodies, the lower the demand for the chosen stock.
The candlestick shadows (also known as tails or wicks) or in other words, the thin lines on the top and bottom of a candlestick if you like.
These shadows are super important to stock traders as they provide important clues about trading sessions.
Upper shadows represent that the session was high.
Lower shadows represent that the session was low.
Candlesticks with long shadows show that trading action occurred well past the open and close.
Candlesticks with short shadows indicate that most of the trading action was confined near the open and close.
If a Japanese candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bid prices higher. However, sellers came in and drove prices back down to end the session back near its open price.
If a Japanese candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced the price lower. However, buyers came in and drove prices back up to end the session back near its open price.
Similar to the bar chart, there are various different frame times stock traders and investors can choose from when using candlesticks. The most popular ones are as follows:
The smaller chart time frame you choose, the closer you look into price action.
And it works the other way too.
The bigger the view, the less detailed overview you’ll get.
Now, that’s all you need to know for now when it comes to the way Japanese candlesticks looks.
Next, let’s take a look at some candlestick patterns and what these mean on stock charts.
These come in four categories:
Let’s explore the formations below and find out what they mean in terms of price action.
(no, we are not speaking a different language)
All of the above are basic candlestick patterns. Let’s look at them in a bit more detail.
A spinning top is a candlestick pattern with a short real body that’s vertically centered between long upper and lower shadows. This candlestick pattern indicates uncertainty in the market and indecision between the buyers and sellers.
Marubozu is a long candlestick with no upper or lower shadow and is very easy to spot due to its long body. The longer the candle, the stronger the price movement!
Doji candlesticks are unique candles where the open and close prices are equal (or almost exactly equal) and their bodies appear as a very thin line. Doji candlesticks also represent uncertainty and indecision in the market.
Single Candlestick Patterns.
Their name comes from the fact that they are composed of just one single candlestick.
Single candlestick patterns come in two main types, each of which has a bullish and bearish version:
• Hammer (bullish) and Hanging Man (bearish)
• Inverted Hammer (bullish) and Shooting Star (bearish)
Hammer and Hanging Man are single candlestick patterns with a small body at the top and a wick at the bottom that is two or three times longer than the body.
If this single candlestick pattern appears in a chart with an upward trend indicating a bearish reversal, it is called the hanging man.
If it appears in a downward trend indicating a bullish reversal, it is called a hammer. It got its name because the market is hammering out a bottom.
Both inverted hammer and shooting star appear as a candle with a small body at the bottom and a wick at the top that is two or three times longer than the body.
An inverted hammer is a bullish reversal candlestick. It appears when prices are falling and indicates that the downtrend may have reached its bottom limit and that prices may be about to reverse upwards.
A shooting star is a bearish reversal candlestick. It appears when prices are rising and indicates that the uptrend may have reached its top limit and that prices may be about to reverse downwards.
What’s better than patterns with single candlestick patterns?
Patterns with TWO candlesticks!
Dual candlestick patterns come in a few various types and in bullish and bearish versions.
A bullish engulfing candle is a dual candlestick pattern, which might signal an upcoming uptrend. The pattern applies after there’s been a period of consolidation or downtrend.
A bearish engulfing candle is a dual candlestick pattern, which signals an upcoming downtrend. The pattern applies after there’s been a period of consolidation or an uptrend.
A tweezer bottom candlestick pattern is a bullish reversal pattern that can be spotted at the bottom of a downtrend. It consists of two candles with very similar new lows, while the second candle reflects more bullish market sentiment as the prices burst higher, in the opposite trend.
A tweezer top candlestick pattern is a bearish reversal pattern that can be spotted at the top of an uptrend. The first candle is bullish but shows rejection of higher prices, and the second candle attempts to surge higher but fails. It signals that the resistance is strong and the market will decline and consolidate.
The evening star pattern is a three-candle, bearish reversal candlestick pattern that appears at the top of an uptrend. It signals the slowing down of upward momentum before a bearish move lays the foundation for a new downtrend.
The morning star candlestick is a three-candle, bullish pattern that signals a reversal in the market. The morning star can be found at the end of a downtrend, signifying a potential turning point in a rising market.
Three white soldiers is a bullish candlestick pattern that is used to predict the reversal of the current downtrend in a pricing chart. The pattern consists of three consecutive long-bodied candlesticks that open within the previous candle’s real body and a close that exceeds the previous candle’s high.
The three black crows pattern is a bearish reversal pattern used to predict the reversal of the current uptrend in a pricing chart. It usually indicates weakness in an established uptrend and signifies the potential emergence of a downtrend.
The three inside up is a bullish reversal pattern that occurs at the end of a bearish trend, signaling the beginning of a potential reversal.
A three inside down is a bearish candlestick reversal pattern that forms at the end of an uptrend, signaling a shift in the direction of the trend.
The pattern consists of a positive candle that’s followed by an inside bar, after which the price breaks down below the opening of the first candle.
And that’s it, phew!
We’ve just covered the main candlestick patterns there are.
Are you feeling confident in being able to spot them on stock charts?