Introduction to Candlestick Patterns



Candlesticks are the most popular chart choice among traders as compared to line chart, bar chart and the point & figure chart. It has gained popularity among the traders as it conveys wide range of trading information in one go in a highly visual way. Candlestick charts are also simple to read and interpret. It consists of a body (rectangle part of the candle) and shadow or wicks (lines above or below the body). Each candlestick also consists of an open, high, low and close price. The trader based on his trading horizon sets the time frame of the candlestick chart.

Interpreting Candlestick Chart

Open – The open is that the 1st value listed and is indicated by either the highest or bottom of the body of the holder.

High – The high is that the highest value listed throughout the fundamental quantity set for the holder, and is indicated by the highest of the shadow that happens higher than the body (called the higher shadow).The high value may well be the open, shut or a high hit among the time-frame of the candle. If the open was the best value then there’ll be no higher shadow.

Low – The low is that the lowest value listed throughout the holder, and is indicated by all-time low of the shadow that happens below the body (called the lower shadow).The low might even be one in every of the 3 costs open, shut or a coffee value hit among the time-frame of the candle .If the open was rock bottom value then there’ll be no lower shadow.

The color of a holder relies on whether or not the {closing value|price|terms|damage} (or the last listed price, if the holder is incomplete) is higher than (green) or below (red) the gap value. whereas the holder is that the method of formation, the holder might perpetually alter because the value fluctuates. The open remains mounted, however the remainder of the parameter i.e. high, low and shut might perpetually amendment. once the fundamental quantity of the candle involves Associate in Nursing finish the last listed value is taken because the damage, when that a replacement holder is made that continues to convey the worth movement over subsequent time phase.

Close – The shut is that the last value listed throughout the holder, and is indicated by either the highest or bottom of the body.

Range – the worth distinction between the higher and lower shadow indicates the vary the worth affected throughout the time-frame set for the holder. it’s calculated by subtracting the high from the low of the holder. vary indicates the volatility related to the holder. Higher the vary, higher is that the volatility and the other way around. (Range = High – Low).

Interpreting candlesticks charts is one in every of the terribly 1st steps in learning the way to trade. Once a bargainer has gained data to interpret a chart he will then pass on to the opposite aspects of technical analysis and develop commerce methods as per his wants.

Use of Candlesticks
Candlesticks tend to make patterns that area unit taken by traders to indentify a continuation or reversal of the prevailing trend. it’s additionally accustomed spot short term commerce opportunities. completely different traders create use of holder charts otherwise. holder patterns ought to be employed in conjunction with the prevailing trend.

Candlestick additionally tends to act as a singular index providing the bargainer a position whereas coming into and exiting a trade. It additionally offers Associate in Nursing early signal of a reversal in trend compared to the remainder of the technical indicators. thus it’s wide employed in short term commerce and in volatile markets.

Candlestick compliments most of the opposite technical analysis indicators and works well with the western technical tools.

Candlestick patters additionally tend to act as support or resistance levels and indicate the beginning of a pullback or bounce.

Time frame
Most holder patterns type over a amount of 1-3 days, that makes them short-run patterns that area unit valid for 10-15 commerce sessions. for instance hammers and hanging man need only one day. Engulfing patterns, optimistic belt hold and dark inclementness patterns need 2 days. 3 white soldier and evening stars need 3 days for the pattern to finish.

Preceding Trend
Candlestick patterns gain significance supported their location among the trend, a reversal holder pattern has validity given that it’s shaped at the top of this trend i.e. there ought to be a previous trend to reverse. optimistic reversals need a preceding downtrend whereas a pessimistic reversal needs a previous uptrend. The direction of the trend will be determined victimisation trend lines, moving averages, peak/trough analysis or alternative aspects of technical analysis.

Tussle between bulls and bears.
Candlestick depicts the fight between the bulls and bears over the set fundamental quantity.

Long inexperienced holder indicates that the commerce session was controlled by the buyer’s i.e. bulls.
Long red holder indicated that the commerce session was controlled by the seller’s i.e. bears.
A long lower shadow indicates the bears managementled the worth till the bulls took control and created a robust comeback.
A long higher shadow indicates that the bulls managementled costs till the bears created a powerful comeback and took control.
Small holder indicates that neither the bulls nor bears might gain management over costs throughout the session.
A long higher and lower shadow indicates a volatile commerce session with each the bulls and bears having gained management however unable to sustain the advantage.

Color of Candlesticks

The color of the candlestick depends on the preference of the trader. The commonly used combinations are

+ ve Day (Open Higher than close)-ve Day (Close lower than open)