Candlestick Pattern & Analysis

Candlestick Pattern & Analysis

A candlestick chart is a style of financial chart used to describe price movements of a security, derivative, or currency.

Candlestick patterns can be made up of one candle or multiple candlesticks, and can form reversal or continuation patterns. The Japanese began using technical analysis to trade rice in the 17th century.

Compared to traditional bar charts, many traders consider candlestick charts more visually appealing and easier to interpret. Each candlestick provides a simple, visually appealing picture of price action; a trader can instantly compare the relationship between the open and close as well as the high and low.

In order to create a candlestick chart, you must have a data set that contains open, high, low and close values for each time period you want to display. The hollow or filled portion of the candlestick is called “the body”. The long thin lines above and below the body represent the high/low range and are called “shadows”. The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body representing the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.

There are many types of candlestick patterns –

  • Single Candles
  • 2 Candles
  • 3 Candles

Single Candles – 

  • Long Green Day / Long Red Day

Long day candlestick consists of real body which is much more longer than its shadow lines. This indicate the great difference between the open price and the close price for a trading day.

  • Short Green Day / Short Red Day

In theory, the short candle cannot make up its mind between a reversal or continuation of the existing trend. Hence shows indecision in the market.

  • Spinning Tops

A type of candlestick formation where the real body is small despite a wide range of price movement throughout the trading day. This candle is often regarded as neutral and used to signal indecision about the future direction of the underlying asset.

  • Dojis

A type of candlestick pattern that signals indecision among traders. There are 3 different types of Dojis – 

  •  
    • Dragonfly Doji
    • Long-legged Doji
    • Gravestone Doji

2 Candles –

Harami– this candlestick is also known as an “Inside Bar“. A candlestick that forms within the real body of the previous candlestick is in harami position. Harami means ‘pregnant’ in Japanese and the second candlestick is nestled inside the first. The first candlestick usually has a large real body and the second a smaller real body than the first. The shadows (high/low) of the second candlestick do not have to be contained within the first, though it’s preferable if they are. Doji and spinning tops have small real bodies and can form in the harami position as well.

  • Hammer
  • Piercing Line
  • Dark Cloud

Engulfing – 

Engulfing patterns consist of two bodies without any shadows and where the second body ‘engulfs’ the first. The picture on the left is an example of a bullish engulfing pattern. They usually mean a bullish continuation. The candlestick pattern on the right is a bearish engulfing pattern. It is very significant at market tops, where sellers are “engulfing” the last standing buyers and push the price lower.

3 Candles –

Stars are made up of a long body followed by a short body with a much smaller shadow (trading range). The bodies of the two must not overlap, though the shadows may. There are three major star candlestick patterns – 

  • Morning Star
  • Evening Star
  • Doji Star

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