Candlestick charts came from Japan more than 100 years before the bar and point-and-figure charts were made in the West. In the 1700s, a Japanese man named Homma found that, while there was a link between the price of rice and how much was sold and bought, sellers’ feelings had a big impact on the markets.
Candlestick charts show how people feel by using different colors to show the size of price changes. Traders use candlesticks to make trade decisions based on patterns that show how the price is likely to move in the short term.
- Traders use candlestick charts to figure out how prices might move based on how they have moved in the past.
- When trading, candlesticks are helpful because they show four price points (open, close, high, and low) over the time period the investor chooses.
- Candlestick charts show information about prices that is used by many programs.
- Candlestick charts show that traders are often led by their emotions.
A daily candlestick shows the market’s open, high, low, and close prices for the day, just like a bar chart. The wide part of the lamp is called the “real body.”
This real body shows the price spread between the day’s opening and closing prices. When the real body is closed in or black (or red), it means that the close was lower than the open. If the real body is white (or green), it means that the close was higher than the open.
In their trading tool, traders can change these colors. On some sites, for example, a trader can make candlesticks out of any two colors that don’t go together, like blue and red. You can choose the colors you want to use on many sites.
Candlestick vs. Bar Charts
Shadows are the vertical lines that are often seen just above and below the real body. Sometimes these lines are called “wicks.”
The lines show what the day’s high and low prices were. If the top shadow of a down candle is short, it means that the day’s open was close to its high.
When the day went up, a short top shadow means that the close was close to the high. The look of the daily candlestick is based on how the day’s open, high, low, and close all fit together. Real bodies can be black or white, and they can be long or short. There are both long and short shadows.
Candlestick charts and bar charts both show the same information, but in different ways. Candlestick charts are easier to understand because the price bars are colored and the real bodies are bigger. Some buyers find it easier to see the difference between the open and close when prices are highlighted in this way.
Basic Candlestick Patterns
Candlesticks are made when the price goes up and down. Even though these price changes sometimes look random, they often follow trends that traders use to analyze the market or make trades.
There are two different kinds of patterns: bullish and negative. Patterns that are bullish show that the price is likely to go up, while patterns that are negative show that the price is likely to go down. Candlestick patterns show trends in how prices change, but they are not guarantees that the pattern will always work.
Bearish Engulfing Pattern
In an upswing, a bearish engulfing pattern forms when there are more sellers than buyers. This is shown by a long red (black) real body that swallows up a small green (white) real body. The trend shows that sellers are in charge again, and the price could keep going down.
Bullish Engulfing Pattern
On the strong side of the market, an engulfing pattern forms when buyers move faster than sellers. The chart shows this by showing a long white real body swallowing a small black real body. Now that the bulls have taken some control, the price could go up.
Bearish Evening Star
An evening star is a shape that goes on top. It can be seen because the last light in the pattern opens below the small real body of the day before. The small real body can be black or white (red or green). The last candle closes deep into the real body of the candle from two days ago. The trend shows that the buyers stopped moving, and then the sellers took over. There could be more selling. The strong opposite of the evening star is the morning star.
A bearish harami is a small black or red real body that is fully inside the white or green real body from the previous day. This isn’t really a trend to act on, but it might be something to keep an eye on. The trend shows that the buyers are not sure what to do. If the price keeps going up after that, the rise may still be going strong, but a down candle after this pattern shows that the price will keep going down.
The bearish harami is the opposite of the bullish harami, which is a picture of a bull. There is a decline, and a small real body (green or white) is inside the big real body (red or black) from the day before. The expert can tell from this that the trend is stopping. If the next day is also good, more good news could be on the way.
Bearish Harami Cross
In an advance, a bearish harami cross happens when an up candle is followed by a doji. A doji is a session where the open and close of the candlestick are almost the same. The doji is inside the real body of the session before it. The same things happen as with the negative harami.
Bullish Harami Cross
In a decline, when a down candle is followed by a doji, this is called a bullish harami cross. The doji is inside the real body of the session before it. The same things happen as with the positive harami.
Bullish Rising Three
The first part of this design is a “long white day.” Then, on the second, third, and fourth trade days, small real bodies push the price down, but they stay within the price range of the first day of the pattern, which is a long white day. Another long white day comes on the fifth and final day of the pattern.
Even though the price has been going down for three days in a row, the pattern doesn’t show a new low, so bull traders are getting ready for the next move up.
A slight change to this trend is when the second day goes up a little less than the first day after the first day goes up a lot. The design is the same in every other way, but it looks a little different. This kind of change is called a “bullish mat hold.”
Also Read: Candlestick Chart Pattern
Bearish Falling Three
A strong down day is the first step in the pattern. Then there are three small real bodies that move up but stay in the same area as the first big down day. When the fifth day makes another big drop, the pattern is over. It shows that the buyers are in charge again and that the price could go down.
What Candlestick Pattern Is Most Accurate?
Over trading periods, candlestick patterns show how traders felt. There is no “most accurate” pattern because they should all be seen as signs of what bull or bear traders might be thinking. However, some traders like certain patterns and act on them.
What Is the 3 Candlestick Rule?
People think that a trend change is about to happen when three candles open and close higher or lower than the previous one. Some traders think that this string of events is proof of a change. Three White Soldiers and Three Black Crows are two well-known three-candle reversal patterns.
How Do You Interpret CandleSticks?
The body and shadows of a candlestick are sometimes called the light and wicks. The high and low prices of an object are shown by the wicks, and the open and close prices are shown by the top and bottom of the candle.
The Bottom Line
Japanese rice traders found out hundreds of years ago that traders’ feelings have a big effect on how an asset moves. Candlesticks help traders figure out what’s going on with the price of an asset. They believe that certain patterns show where the price of an asset might be headed.