Introduction to Candlestick Charts
Let’s start with Complete Candlestick Pattern basically Candlestick charts are used to illustrate the price movements of an asset over a given period, such as a day, week or month. The body is the rectangular portion of the candlestick while the wicks/shadows are the lines that extend beyond the body of the candlestick. A candle depicts the opening and closing prices, the colour, usually green or red to show if the closing price was higher or lower than the opening price, the wick shows the price extremes.
Complete Candlestick Pattern
History of the Candlesticks and Origins
The chart type and the innovation of the candlestick charts originates in Japan about the 17th century. It were the rice traders, who originally used the candlestick chart to be able to follow along and so predict the future trading patterns. Later on, in 20 th century, this chart was passed on to West and the digital trading generation, quicker and more visually effective than previous means of framing the data. Use of the candlestick charts became more popular and famous.
What are Candlestick Charts?
A chart of candlesticks is a type of a chart which might be used on the financial markets such as a stock, currency or a bond market, any period may be applied for such trading activities as day, week or month. Candlestick charts may easily illustrate the trade activity over that specific trading period. Different types of components might be identified and used in candlestick charts to explain the current situation:
Candlestick Body: The main rectangular part of the candlestick represents the price range between the opening and closing prices during the chosen timeframe.
Upper Wick (Shadow): A line extending vertically from the top of the body indicates the highest price reached during the period.
Lower Wick (Shadow): A line extending vertically from the bottom of the body shows the lowest price reached during the period.
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Types of Candlestick.
Marubozu
Bullish Marubozu: A Bullish Marubozu indicates a powerful buying pressure for the entire trading session. Lack of upper and lower wicks implies that bulls were in charge the whole day from the opening bell to the closing bell. It emerges in the course of uptrends or as a potential reversal pattern at the bottom of a downtrend
Bearish Marubozu: “A Bearish Marubozu is a strong selling signal, where there is no wick and it is a bold candle”
A Bearish Marubozu is a strong selling pressure signal meaning the absence of both upper and lower wicks in this candle. This candle shows that bears were in charge starting from the opening bell to the closing bell. The candle often appears along the downtrend or at the top of the uptrend as a potential reversal pattern.
Doji
Doji: In financial markets trading, Doji means that the market is probably indecisive or in the state of equilibrium between the 2 sides, that is buyers and the sellers during that trading session. It usually forms at a significant level of support or resistance suggesting that the trend might continue by reversing the candle depending on the context. So the importance of a doji candle depends on the context or area it forms as it implies an equal match between the bulls and the bears.
Dragonfly Doji: This is a Dragonfly Doji. It appears when the candle’s open, high and close prices are almost similar. Once you see a dragonfly doji, there is a chance of a bullish reversal or it may represent a support area at the end of a downtrend.
The long lower wick or shadow shows that sellers managed to drag the price much lower during the session but the bulls managed to regain control by the close. They come in from the session’s low to push the price upwards. In other words, the price has changed from being pushed lower to closing higher. The appearance reflects the sentiment has changed from bearish to bullish. Purchasers who had taken a wait and see attitude on the lows of the session’s price are now more aggressive to prevent the prices from falling beyond the session lows.
Gravestone Doji: A Gravestone Doji could be viewed as a sign of a potential bearish reversal or resistance at the converted support – former resistance level which has become support at the top of an uptrend. The long upper wick shows that the buyers were able to push the price up a great deal during the session but they were overwhelmed and the sellers managed to take over control by the close. This is the point where the market attitude shifted from bulls to bears, and what follows could be of a period of slow price decline from those highs.
Hammer and Hanging Man
Hammer: What seems to be a Hammer formation is recognizable after a downtrend, and signals a bullish reversal. From the candlestick, it may be seen that the sell-off was the work of bears, but buyers managed to push the price back up to the closing. There is a long lower wick on the candlestick, indicating buying was more aggressive at the lower prices. It sets the price to test the closing marking on the next period.
Hanging Man In the given chart pattern, a Hanging Man has formed, with the pattern suggesting bearish reversal potential. The long lower wick, joined by a small body located near the top of the candlestick, indicates that the buyers have lost control towards the end of the period when they pushed the price up. However, bearish sellers exerting strong selling pressure at the top have kept the price near the closing level.
Engulfing Patterns
Bullish Engulfing More specifically, A Bullish Engulfing is a significant two-bar indicator that signals a possible end to the downtrend and shift to an uptrend. It is a bullish reversal pattern comprised of a black candle, which is followed by a larger white candle representing a lower opening and a higher closing values than the previous day. Moreover, it is considered to be a validation of an uptrend if the low of the white candle is located above the low of the black candle. However, when the price of the security opens above the high and closes below the low, it becomes invalid.
Bearish Engulfing: A Bearish Engulfing Candle Stick Pattern is seen at the top of an uptrend and it suggests a change in the sentiment of the market from bullish to bearish. It means that the sellers have overpowered the buyers which creates a downwards momentum. The size of the bearish candlestick pattern is larger than the size of the bullish candlestick setting up the pattern which indicates that the selling pressure is extremely high and the downtrend may continue.
Dark Cloud Cover and Piercing Line
Dark Cloud Cover: Dark Cloud Cover provides evidence indicating a change in sentiment from bullish to bearish. It shows that after a run-up in prices, the sellers have taken over and brought the price back down. Since the close of the second candlestick is below the center of the previous bullish candle, it indicates a possible weakness of the uptrend.
Piercing Line:It signals a transition from bearish sentiment to bullish sentiment. It can be said that after several days of falling, the bulls took the initiative in their own hands and confidently went into the attack, because the closing of the second candle is already above the middle of the first bear. There is a certain probability of weakness in the upward motion or in the reversal.
Morning Star and Evening Star
Morning Star: The morning star pattern indicates a potential reversal from bearish to bullish sentiment.
Upon a long downward movement, the period of indecision or consolidation is followed by strong buying pressure.
The key point is the close of the third candlestick in a position higher than the first candle’s midpoint; it strongly signifies the potential strength and more pronounced uptrend following the reversal.
Evening Star: The Evening Star pattern is prompting a change in the current trend from bullish to bearish. According to the general rule, the Evening Star candlestick pattern is a warning that the current uptrend may be changing direction. There is a period of indecisiveness after a trend when the prices consolidate on a flat line, followed by a strong selling force to reject the bulls higher. The third candlestick closing below 50% of the first candlestick’s line indicates the strength of the potential plays, and the price may go downward.
Spinning Tops and Shooting Stars
Spinning Top: A Spinning Top implies that there is indecision between the buyers and sellers during the trading period, which is suggested by a small body formed. During the whole session, there were price fluctuations, but the opening and the closing prices were not too different. The long upper and lower wicks, which have also been formed, show that both bulls and bears had chances to keep the price higher or lower, but neither of them achieved that..
Shooting Star: A shooting star pattern is seen at a peak of an uptrend and may indicate its weakness. The small body near the bottom of the candlestick shows the opening, after which buyers have been able to push the price up. However, during the session they have lost control and by the closing, the sellers have been able to push the price back down. The long upper shadow of the candlestick shows how far the price has moved upwards. The shooting star is a bearish signalling candlestick.
Conclusion
Overall, there are numerous candlestick patterns to help traders and analysts assess market sentiment, forecast possible price movements and make comprehensive trading solutions using historical price data and patterns. To sum it up, it is possible to make a conclusion that candlestick charts create detailed and expressive visual representation of price movements and are undeniably indispensable tools for every trader and analyst. Understanding their basics and mastering their interpretation allows a person to improve one’s ability to handle the obstacles of financial markets.
Can candlestick patterns predict future price movements?
Candlestick patterns are used to predict potential reversals, continuations, and trends based on historical price data. While they provide insights into market sentiment and probabilities, they are not infallible predictors. Traders often combine candlestick patterns with other technical indicators for confirmation and to enhance accuracy.
How do you read a candlestick chart?
Reading a candlestick chart involves interpreting each candlestick’s components:
- The body represents the difference between the opening and closing prices.
- The upper wick (or shadow) indicates the highest price reached.
- The lower wick (or shadow) shows the lowest price reached.