What Is A Candlestick Chart?
A candlestick chart is a type of chart pattern and a technical tool, that packs price data of multiple intervals in a single bar. The chart describes is used to describe the price movement of securities, derivatives, and different currencies. The candlestick charts can be built at different intervals, which is way more than 1 day and way less than 1 day.
The candlestick chart was discovered by a Japanese man named Homma Munehisa a rice trader, in the 1700s.
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Components of Candlestick Charts
Just like other charts candlestick chart consists of stock’s opening, high, low, and closing price. The candlestick chart has a wide body, called as “real body”.
The “real body” of the candlestick chart represents the opening and closing price range. In this diagram, the white candle is the bullish candle as the opening price is lower than the closing price. The black candle represents bearish candle as the opening price is higher than the closing price.
- Candlestick charts are mostly used by short-term traders and day traders to predict future possible price movements based on security’s past price action.
- Candlesticks are useful when traders use different time intervals and compare them to predict future movements.
- Many trading algorithms works nearly perfect using and based on the candlestick chart patterns.
- Day trading is often driven by emotions of traders, which can be observed in candlestick charts.
Heikin-Ashi candlestick is a version of candlesticks, that is used in conjunction with candlestick charts to find a security’s major trend. Heikin-Ashi is means “average bar”. The Heikin-Ashi Candlesticks employ open and close data from the earlier interval and the open, high, low, close data from the current time frame to create a combo candlestick chart.
The technical analyst uses Heikin-Ashi candlesticks to know when to hold a stock with the market trend and to sell the stock when the trend pauses or reverses.
Basic Candlestick Patterns
The Candlestick patterns are created by upward and downward movements in the stock’s price. While these pattern formation some of them are random and some of them are used by traders in the form of technical analysis. Here are a few basic candlestick patterns.
Marubozu is a technical indicator in candlestick charts used in technical analysis, that indicates a stock has traded strongly in a single direction throughout the entire interval and closed at its high or low price.
As shown in the above figure marubozu candle is represented only by a body and it has no wicks or shadows, from its top or bottom. A bullish marubozu candle has a long green body and is formed when the open equals the low and the close equals the high.
A bearish marubozu forms when the open equals the high and close equals the low as shown in the above figure, the red one is a bearish marubozu.
Doji is a common candlestick pattern, found on the candlestick charts. When the opening price of a stock is similar to the closing price of the stock, then a Doji pattern forms. It is a major trend reversal pattern.
Hammer is a type of bullish trend reversal pattern in the candlestick charts. The candlestick pattern looks like a hammer, as shown in the image, it has a long lower shadow and a shorter body at the top of the candlestick with no upper shadow.
In order for a candle to be a valid hammer (that most works) the lower shadow must be twice or greater the size of the body portion of the candlestick, and the body of the candlestick must be at the upper end of the trading range.
When you see the hammer form at the bottom of a chart or in a downtrend, then this is the sign of a potential reversal in the market or stock, whichever you’re watching.
The inverted hammer is the upside-down version of the hammer candlestick pattern generally found after a downtrend and is usually considered to be a trend reversal signal. When the candlestick pattern appears in an uptrend, it is called a shooting star, which is a bearish signal.
The candlestick pattern is a great discovery along with some great uses. Most of the technical analysts use candlestick chart patterns and for some it works quite well. The candlestick chart helps investors to measure a stock’s movement and helps them predict future price movements.