Candlestick Chart Guide & Documentation

Bullish charts show that the price will probably rise, while bearish charts show that the price will likely fall. No chart type works all the time, because candlestick charts show tendencies in price movement, not guarantees. The size of a candlestick’s real body along with its wicks or tails can indicate a market’s volatility. Long wicks or tails in conjunction with a small real body signify a volatile market. When a candle has long wicks with a relatively small real body the candles appear “spiky”.

This is done by representing various sizes and directions of price moves with different colors. Traders use candlesticks to make decisions about the markets, based on patterns that emerge. Formation of a simple or complex Candlestick pattern during such market condition confirms and verifies the impending contrarian price action for the trader. Placing their order in the market using this combination of technical factors can significantly improve the accuracy of their trades. For example, by using oscillating technical indicators, a trader will first wait for a signal that the market has moved into an overbought or oversold condition.

The Story Behind Each Candle

It is identified by the last candle in the pattern opening below the previous day’s small real body. The last candle closes deep into the real body of the candle two days prior. The pattern shows a stalling of the buyers and then the sellers taking control. However, while Candlestick charts make it much easier to interpret price action, it lacks the smoothness of the line chart, especially, when the market opens with a large gap. Hence, professional traders often end up using a short time period moving average to get the “feel” of a smooth trend, or lack of trend, in the market.

​An engulfing pattern on the bullish side of the market takes place when buyers outpace sellers. This is reflected in the chart by a long green real body engulfing a small red real body. With bulls having established some control, the price could head higher. The lines marked above and below the real body are known as the shadows or wicks. The difference between the high of the period and the opening/closing price is called the upper shadow. The difference between the low of the period and the opening/closing price is called the lower shadow.

Different Types Of Candlestick Patterns Convey Different Messages

To confirm the hammer candle, it is important for the next candle to close above the low of the hammer candle and preferably above the body. A typical buy signal would be an entry above the high of the candle after the hammer with a trail stop either beneath the body low or the low of the hammer candle. It is prudent to time the entry with a momentum indicator like a MACD, stochastic or RSI.

Candlestick charts are used to plot prices of financial instruments throughtechnical analysis​. The chart analysis can be interpreted by individual candles and their patterns. Bullish candlestick patterns may be used to initiate long trades, whereas bearish candlestick patterns may be used to initiate short trades. The color and length of the real body reveals whether the bulls or the bears are in charge. Note that the candlestick chart lines use the same data as a bar chart . Thus, all Western-charting techniques can be integrated with candlestick chart analysis.

How To Use Candlestick Charts

Upper shadows represent the session high and lower shadows the session low. Candlesticks with short shadows indicate that most of the trading action was confined near the open and close. Candlesticks with long shadows show that prices extended well past the open and close. If the preceding candles are bearish then the doji candlestick will likely form a bullish reversal.

Day Trading is a high risk activity and can result in the loss of your entire investment. The large top wick represents rejection of a higher price in favour of a lower price and can therefore denote bearish sentiment. The dragonfly doji has no real body with a long wick to the bottom. The large bottom wick is evidence of rejection of a lower price in favour of a higher price, and therefore can denote bullish market sentiment. Let’s look at an example of how a candlestick chart can help you avoid a potentially losing trade. In the circled area of Exhibit 1, the stock looks strong since it is making consecutively higher closes.

More On Forex

Thanks to history having a habit of repeating itself, a number of time tested common candlestick patterns have been identified. close is the last trade price for the candlestick period and marks the other end of the body. Traders interpret this pattern as the start of a bearish downtrend, as the sellers have overtaken the buyers during three successive trading days. It signifies a peak or slowdown of price movement, and is a sign of an impending market downturn. The lower the second candle goes, the more significant the trend is likely to be.

Candlestick charts are one of the most prevalent methods of price representation. Munehisa Homma, a rice trader, is regarded as the originator of the concept. He used candlestick charts in the rice futures market, with each candlestick graphically representing four dimensions of price in a trading period. These four dimensions are the open, the high, the low and the close.

Candlestick Chart Basics

This candlestick chart is available right there so you can play with its code in a convenient way. Bearish Engulfing pattern is formed when a small hollow Candlestick is followed by a large solid Candlestick which completely ‘engulfs’ the smaller Candlestick. It indicates that the sellers have taken control of a stock’s price movement from the buyers. Candlestick Charts like the following depict a bull trending market. Higher highs and higher lows as long as the retrace low don’t extend lower than the previous low then up trend is expected to continue.

A long wick on either side of the candlestick indicates strong rejection of a price level by the market. In the below video, Ryan talks through nine candlestick patterns that all traders should be familiar with. He discusses how to analyse What Are Discount Stock Brokers, what they mean in the financial market, as well as using the Next Generationtrading platformto illustrate how to use them in practice. These candlestick charts include the doji, the morning star, the hanging man and three black crows. Ryan talks through reading candlestick charts like a professional, and what they mean for your trading strategy. The relevance of a doji depends on the preceding trend or preceding candlesticks.

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With time, the candlesticks group into easily recognizable charts. Traders can use these charts to make buying and selling decisions. The body of a candlestick is drawn as a rectangle, which marks the open and the close of a period. In a bull candle, the open is indicated by the bottom of the rectangle while the close is indicated by the top of the rectangle.

• A downtrend might exist as long as the security was trading below its down trend line, below its previous reaction high or below a specific moving average.
• If the open or close was the highest price, then there will be no upper shadow.
• A bearish engulf candle is the opposite as it forms at the top of the trend with a red candle body that completely swallows the high and low range of the prior green candle.
• If the asset closed higher than it opened, the body is hollow or unfilled, with the opening price at the bottom of the body and the closing price at the top.
• Green Heikin-Ashi candles with no lower wicks generally indicate a strong uptrend, while red candles with no upper wicks may point to a strong downtrend.
• Candlesticks reflect the impact of investor sentiment on security prices and are used by technical analysts to determine when to enter and exit trades.

high is the highest trade price for the candlestick period and is also displayed as a wick, which is a vertical line. century Japan, Candlestick Charts were used to interpret price trends. They were introduced to the Western world by American Steven Nison through a series of books starting in 1991 with, “Japanese Candlestick Charting Techniques”. While originally plotted by hand, computer technology enabled them to be created quicker and more efficiently.

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Author: Lorie Konish