Candlestick Chart Pattern
It is believed that use of candlestick originated from Japan in 1700 by rice traders. Over years, its popularity grew significantly as more and more analyst found value in using them. Currently, there are more than 100 patterns recognized based on candlestick formation. In this era, you will hardly find one charting tool that does not have candlestick charting in it. That itself speaks to the value that this way of representation provides.
What is Candlestick Chart?
Candlestick is one of the most popular ways of representing price movement of a stock in a graphical manner. To give the context of where candlestick fits, it may be useful to mention another common type of charts. They are line chart, bar chart etc. A simple example of all three type
The composition of Candlestick - A candlestick composes of four different points of price movement in a day. They are Open Price, Close price, High Price, Low Price.
Parts of candlestick Chart pattern
1. Candle Body: Using these four prices, a candlestick is drawn in such a way that the range of opening price and closing price is plotted as a candle (rectangular structure). The higher the difference between Opening and closing price, the higher is the length of the candle. The width of the candle is more than the width of the standard line and is generally kept in such a way it is quite easily visible.
2. Candle Wick (Shadow): Candlewick is a thin line at top & bottom of candle body. This line starts from the center of the top and a bottom portion of a candle.
a. Upper-wick: It is a thin vertical line drawn from center of the top end of the body to the highest price of the day.
b. Lower-wick: It is a thin vertical line drawn from center of a bottom end of the body to the lowest price of the day.
Types of candlestick Chart Pattern
Bullish: A bullish candlestick is formed when the closing price of the share is more than the opening price.
Bearish: A bearish candlestick is formed when the closing price of the share is less than the opening price.
Doji: A Doji candlestick is formed when closing price is same as opening price.
Understanding candlestick to gauge market sentiment.
Single candle. As we have learned how a candlestick is formed. Now let’s try to understand what we can make out of it. In the simplest form, a bullish candlestick denotes that there was some optimism on the stock price upward move at the end of the candlestick period. And in the same way, a bearish denotes general pessimism on the stock.
On carefully observing them, it provides more than open, close, high & low price. It can tell how the market is perceiving the stock on a given day. For example, if the close price is much higher than opening price (long candle) then it denotes general bullish sentiments on the stock. In other words when the stock opened the buying sentiment was much lesser than towards the end of the day, or buying pressure was more than selling pressure. This indication is more when the upper wick is small.
Similarly, when closing price is much lesser than opening price then it signals weakness in the stock. A small body with small wick signals less volatility in the stock. Also known as a Doji. A small body with very long wicks means lack of direction on the price movement and coupled with huge volatility.
Multiple candlestick patterns. As we now understand what a single candlestick can provide. Similarly, when more than one candlestick in combination can provide very meaningful interpretations of price movements, trend continuation, trend reversals etc.
Advantages of Candlestick Chart Pattern
1. It provides more information than just price point.
2. Patterns formed by candlestick are easier to identify.
3. They can provide important trend reversal.
4. They provide latest market mood in a very easy form.
5. They can be used in conjunction with other indicators.
Now we have understood what candlestick pattern is. Now it’s time to look into some of the most commonly formed patterns. We have categorized them into following categories. Please follow these links to find about these patterns. We have explained them in details and provided you with ample real-life examples of them.