What Is a Candlestick Chart?
A candlestick chart is a famous perception instrument utilized by investors to examine the price movement and trading patterns of a stock or other security. For each trading period or unit of time (e.g., at some point), one candlestick shows up on the chart.
You can picture a candlestick as a vertical candle that is consuming at the two finishes — each candlestick has a real body (the bulk of the "candle") and an upper and lower "wick" or shadow. Every candlestick gives five snippets of data about the security being referred to during the day (or time span) being referred to:
- Its opening price (addressed by the highest point of the real body)
- Its closing price (addressed by the lower part of the real body)
- The highest price it traded at (addressed by the highest point of the upper wick/shadow)
- The lowest price it traded at (addressed by the lower part of the lower wick/shadow)
- Whether the day's closing price was higher (typically green or white) or lower (generally red or black) than its opening price
Diagram: How to Interpret a Candlestick Chart
Candlestick Charts versus Line Charts: How Do They Differ?
Normal line charts for stocks and different securities regularly show a single line that goes all over comparable to the Y-hub (which addresses price) as it moves consistently to the right corresponding to the X-pivot (which addresses time). At the end of the day, a single line shows how a security changes in price after some time. A line chart can hypothetically follow a security's price step by step, hour-by-hour, and, surprisingly, minute-by-minute relying upon the chart's settings.
Candlestick charts are comparable, yet rather than displaying a single, solid line, they display a single candlestick for every unit of time, every one of which gives the five snippets of data listed above (open, close, high, low, and whether the security went up or down in price). Candlestick charts can show at least one candles each day, week or month, however they could likewise show one candle each hour, one candle each moment, and so forth.
As such, while line charts just track price movement over the long haul, candlestick charts give understanding into buying and selling trends throughout every day (or other unit of time) by showing high and low prices as well as open and close prices.
Candlestick Chart Interpretation Example: MSFT
We should investigate a candlestick chart for Microsoft for the trading seven day stretch of 02/14/2022 wherein each candle addresses one trading day.
On Monday the fourteenth, we see a green candlestick with a somewhat short real body and upper and lower wicks of generally equivalent length. The green real body lets us know that the stock closed higher than it opened that day; as such, it got more expensive. The fact that the real body is somewhat short lets us know that the open and close prices weren't excessively far separated; as such, the stock got more expensive however not by without question. The upper and lower wicks let us know that over the course of the day, the stock plunged below its opening price eventually and surpassed its closing price by a comparative amount at another.
On Thursday the seventeenth, we see a red candlestick with a generally long real body and somewhat short upper and lower wicks. The red real body lets us know that the stock closed lower than it opened that day; all in all, it went down in price. The length of the real body lets us know that its price change was fairly huge — unquestionably more so than the price change on the fourteenth. The short upper and lower wicks tell that while the stock surpassed its open price and drop lower than its closing price, it didn't do as such by much.
What Are Candlestick Charts Used For?
Candlestick charts are utilized essentially in technical analysis, which is a cycle through which investors and analysts endeavor to predict price changes in securities in light of factors like chart patterns, trading volume, and historical data as opposed to company fundamentals.
By examining historical price and trading data across endless securities, technical analysts have recognized a number of patterns that more than once show up in candlestick charts and frequently demonstrate something huge and actionable, similar to a downtrend, an uptrend, or a reversal in price movement.
While past events don't guarantee future outcomes, the market truly does in some cases act and react to some degree predictably. Thus, numerous traders endeavor to recognize realized candlestick patterns in the charts of different securities they are keen on to go with buy and sell choices.
Is Trading Based on Candlestick Patterns a Good Idea?
It's memorable's important that candlestick chart pattern analysis is more famous than any other time in recent memory with both retail traders and higher-powered stock players like hedge funds. Bigger scope investors are frequently able to execute automated trades very immediately founded on calculations that predict what smaller-scale traders are probably going to do, so not all candlestick patterns are essentially as reliable or valuable as they used to be for the regular investor.
Candlestick patterns can look a little changed each time they show up, and they don't necessarily yield similar outcomes. Before trading in light of candlestick patterns, it's important to practice distinguishing them and examining the outcomes in hindsight. Dealing with a virtual portfolio (i.e., trading stocks with "imagine" money) is one effective method for practicing making trades in view of candlestick patterns without gambling any actual capital.
6 Basic Candlestick Patterns and What They (Sometimes) Mean
Numerous candlestick patterns exist, and a few patterns are more reliable than others in terms of how frequently their expected results work out as expected. Some are bullish (i.e., they demonstrate a potential uptrend), while others are bearish (i.e., they show a potential downtrend). Below are a couple of the most essential.
1. Hammer (Bullish)
A hammer candlestick has a green (white) real body, a long lower wick, and a short or non-existent upper wick. It shows up at the lower part of a downtrend and demonstrates that sellers drove the price of a security down for a large part of the day, yet by close, the security's price moved back up past its open as buyers assumed command. This is a bullish pattern that might demonstrate a reversal (i.e., that the security being referred to is going to start getting more expensive in the wake of falling).
Note: Sometimes, a hammer or inverse hammer might be red (black) rather than green. This is as yet considered a bullish signal insofar as it occurs at what could be the lower part of a downtrend, however a green hammer is considered a stronger indication of a looming reversal.
2. Bullish Engulfing (Bullish)
A bullish engulfing is a two-candlestick pattern that occasionally shows up at the lower part of a downtrend and may demonstrate a reversal. The main candle in the pattern is red and has a short real body. The second is green, has an essentially longer real body, and opens lower than the previous day.
3. Morning Star (Bullish)
A morning star is a three-candle pattern that occasionally shows up at the lower part of a downtrend and may demonstrate a reversal. The primary candle is red and has a moderately long real body. The subsequent candle might be red or green however has a very short real body with upper and lower wicks making it look like a star. The third is green and has a long real body, connoting buyers assuming command over the security's course. The real body of the morning star candle in the middle frequently doesn't overlap with the real bodies of the candles on one or the other side.
4. Hanging Man (Bearish)
A hanging man pattern is basically the inverse of a hammer pattern. It happens toward the finish of an uptrend and may signal a reversal. A hanging man candle is generally red and has a short real body and a long lower wick, connoting a notable selloff during the day preceding buyers had the option to push the price back up before close.
5. Bearish Engulfing (Bearish)
A bearish engulfing pattern is basically the inverse of a bullish engulfing pattern. It is a two-candle pattern that commonly happens at the highest point of an uptrend and may mean a reversal. The primary candle is green and has a short real body, while the second is red and has a fundamentally longer real body. The subsequent candle in this pattern as a rule opens higher than the first.
6. Evening Star (Bearish)
An evening star pattern is basically the inverse of a morning star. It is a three-candle pattern that occasionally shows up at the highest point of an uptrend and may demonstrate a reversal. The principal candle is green and has a generally long real body. The subsequent candle might be red or green yet has an incredibly short real body with upper and lower wicks, making it seem to be a star. The third is red and has a long real body, connoting sellers assuming command over the security's bearing. The real body of the morning star candle in the middle frequently doesn't overlap with the real bodies of the candles on one or the other side.
What Is a Doji Candlestick?
A doji candlestick is unified with a tiny or close to nonexistent real body. This shows that open and close prices for the afternoon (or period being referred to) were almost something very similar. Morning and evening star patterns both happen when a doji candlestick shows up toward the finish of an up or downtrend.
What Does a Candle With No Wicks Indicate?
On the off chance that a candlestick has no wicks (shadows) this means that the security being referred to traded between its open and close prices for the entirety of the day (or period being referred to). A candle without any shadows might demonstrate strong market sentiment in anything that course the candle is heading (up if green, down if red).