What are Candlesticks?

Candlestick charts are a type of price charts that show the opening, closing, high, and low price of a security, for a specific period. They originated in Japan when the rice merchants started using them to keep track of the market prices and momentum. Hundreds of years later, candlesticks entered the modern trading market and have been used, widely and effectively, ever since.

The most significant characteristic of candlesticks is that they are quite simple to interpret. They give a visual representation of the price movement and make it easier and quicker for the day traders to decipher the price action. They also use different colors to make the charting more visually appealing.

Why Do We Need Them?

Candlestick charts are used widely for technical analysis in day trading. They are of high importance to the day traders due to their simplicity and reliability. The candlestick charts condense price data from different time frames into one price bar.

Thus, candlestick patterns help the day traders in understanding the emotions around stock so that they can make better and more accurate predictions about the ensuing trends. Each candlestick has a story, psychology, and pattern or direction behind it.

Are There Alternatives?

There are, indeed, many alternatives to candlestick charts like line charts, point and figure charts, and bar charts. One of the most common alternatives is bar charts. Both bar charts and candlestick charts provide the same information regarding the price movement of stocks, just in different ways.

Candlesticks are preferred over bar charts as they are easier to interpret and visually more appealing. The color coding used in candlesticks highlights the difference between the opening and closing price.

Reading A Single Candlestick

Let us explain the structure of a single candlestick through pictorial representation.

A green colored candlestick represents rising price. This means that the closing price was higher than the opening price. Similarly, a red candlestick is a declining price candlestick which infers that the closing price was less than the opening price.

A candlestick consists of a wide part or the colored body with open price and close price, along with a topping tail or upper shadow that represents the high and bottoming tail or lower shadow which represents the low. Thus, the shape and color of a candlestick depend on the relationship between the open, close, high, and low prices of the stock.

To learn more about the Japanese Candlesticks, please watch this video as part of Tradenet’s free day trading course. You can also read about the Japanese Candlesticks at length in The Market Whisperer here.

Why are the parts of Candlestick important to us?

Each part of a candlestick tells a story. It represents the emotions surrounding the stock. Long green candlesticks indicate buying pressure in the market while long red candlesticks depict strong selling pressure. Additionally, long shadows indicate that the price of the security ranged beyond the open and close prices while short shadows show that the price of the security hovered around the open and close prices.

Along these lines, candlestick charts become critical for day traders to analyze price movements of the stock, make predictions based on the changes, and execute trades accordingly. To get more details on technical analysis and how to use it, please access this video on Tradenet’s YouTube channel.

Types of Candlesticks

Some of the most commonly used candlestick patterns are as follows:

Marubozu Candlestick – Marubozu candlestick is the one with only a real body and no upper and lower shadows. In this case, the high and low prices are represented by the open and close prices. Marubozu candlesticks can be both green or red.

Doji Candlestick – Doji Candlesticks have very small bodies with the close price being near the open price. The upper and lower shadows are both long, indicating indecision in the stock’s price action.

Dragonfly Doji – This type of candlestick forms when open, high, and close price is the same, and the low prices forms a long lower shadow.

Gravestone Doji – Gravestone Doji is the reverse of dragonfly Doji. It forms when the open, low, and close price is the same, and the high price forms a long upper shadow.

Hammer Reversal Candlestick – Hammer Candlesticks also have a small body, but one of the shadows is much longer than the other. These form when the price of the stock sharply rejects the support and resistance levels.

Spinning Top Candlestick – Spinning Top candlesticks are similar to Doji candlesticks. However, their bodies are wider indicating larger difference between the open and close prices. They also have long wicks on both sides indicating a large variance between the high and low prices.

To learn more about candlestick patterns and their interpretation, visit Tradenet Wiki.

Basic Analysis of Candlestick Chart

The candlestick chart above confirms a bullish pattern. It shows spinning top candlesticks and Doji candlesticks, followed by a long green hollow candlestick.

This chart gives bullish confirmation to the 200-day moving average around October 10 and February 5. The chart also confirms an oversold condition.

As a bottom line, candlestick charts are one of the most commonly used technical indicators in day trading. They are used extensively due to easy and visually appealing interpretation. More details on how to use candlestick patterns and other technical indicators for technical analysis is available on Tradenet Day Trading Academy in the form of videos, live trading sessions, and free day trading courses.