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Why Candlestick Charts And How to Read Them

Candlestick Charts are the specific indicators that represent the price action or value of a stock market. Let’s see what a Candlestick chart is and how to do a candlestick chart analysis.

Candlestick Parts – Candlestick Chart Analysis

There are different types of candlesticks. A candlestick is either seen in green or red color. In order to interpret a candle, you need to understand the terminologies used to describe the various parts of a candlestick. The following are the elements of a Candlestick…

A basic candlestick has three essential parts:

  1. Lower Shadow
  2. Real Body
  3. Upper Shadow

So the upper shadow and lower shadow represent different readings for green and red candlesticks.

Importance of candlestick charts

Candlestick charts are the working tools of technical analysts. They use charts to plot the price movement of a stock over specific timeframes. A candlestick chart can also show the history of the volume of the trade viz a chart can depict the number of shares that change hands over a certain time period. 

An aspiring trader is always at an advantage if he uses candlestick charts for the technical analyses of a stock to make a trading decision.

How to read Candlesticks

The real body is the difference between the opening price and the closing price of the candle for a specific time frame viz a day, week or month.

Open Price- The top of the red candle and the bottom of the green candle is the open price. The opening price of the red candle shows a downtrend and that of the green candle shows the uptrend.

Close Price- The top of the green candle and the bottom of the red candle is the closing price.  The closing price of the green candle shows uptrend and that of the red candle shows the downtrend.

Shadows- The shadows are the lines above and below the real body of the candle. They show the highest and lowest price went during that time frame.

Candlestick charts

Patterns and assumptions for candlesticks charts  

The movements in the price of a stock contribute to making the body of a candlestick. At times the price movements may appear to be random otherwise they form patterns used by traders to take any trading action regarding that stock. Patterns can be classified into bullish or bearish and accordingly any trader gets an insight on what the current trend is- will the prices go up or go down?

Here we explain the most used patterns by traders for a rewarding trade, including with it the psychology required to interpret the analysis of these patterns.

 

  • Hammer

 

Pattern psychology:

A hammer pattern shows that the market has been in a downtrend depicting the bearishness. The price starts to trade lower after it opens. However, the bulls step in and the sell-off is abated resulting in a bullish market. The bulls start bringing the price back up towards the top of the trading range.

 

  • DOJI (INDECISION)

 

Pattern psychology:

Doji represents the indecisiveness of Buyers and Sellers. This means, where buyers are strong at lower levels to take the price towards high, the sellers to remain active at higher levels to bring the price low. This leads to indecision where buyers and sellers both are in a tough fight on where to take the price. Generally, when we see this concept practically, this point (DOJI) is a reversal signal to the previous trend. For example, if we have a series of bearish candles followed by a perfect Doji candle, chances are high that a reversal might take from this level. This is one of the favorite candlestick studies to catch the reversal of the trend. 

 

  • Bullish engulfing

Pattern psychology:

The price opens at a lower level than its previous day, post the decline. Before the close of the day, owing to an increase in demand by the buyers there is an increase in the price above the opening price of the prior day.

 

  • Bearish Engulfing pattern

Criteria, signal enhancement, and psychology is the same as bullish engulf except price action

After reading this blog you’ll certainly be able to interpret any candlestick chart or it’s patterns. Stay tuned for more updates and simplified explanations on concepts of technical analysis.

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