What is Candlestick?
A Candlestick is a way of representing the movement of financial security within a specific period on a chart. It displays the four crucial elements of security for a specific period i.e.
- Open
- High
- Close
- Low
Candlesticks were invented in Japan around 1700 A.D. It is believed that these candlesticks were developed by rice merchants whFo used to read the sentiment of Rice Market by using these candlestick patterns. Since they have been invented in Japan, therefore they are also called Japanese Candlestick patterns.
They show the trend of the market and they also reveal the force behind the trend, unlike the other types of chart.
Components of Basic Candlestick pattern
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Candlestick patterns |
A basic Candlestick consists of a rectangular part which is called the body of the candle and it also consists of two vertical lines above and below the body which are called shadow or wick of the candle.
The extreme of the upper shadow represents the high of the security for the period and the extreme of the lower shadow represents the low of the security for the specific period.
Types of Candlestick Patterns
Bullish Candlestick Patterns
When the colour of the candlestick is green or white, it shows that there is bullish pressure and hence it is called Bullish candlestick pattern. A green coloured candlestick is formed when the close of the candle is higher than its open.
A strong Bullish session is shown by a candle which opens near its low and closes near its high.
Bearish Candlestick Patterns
When the colour of the candlestick is red or black, it shows that there is bearish pressure and hence it is called a Bearish candlestick pattern. A red coloured candlestick is formed when the close of the candle is lower than its open.
A strong Bearish session is shown by a candle which opens near its high and closes near its low.
Most Significant components of Candlestick Pattern
The most important components of a candlestick pattern are: Colour and shape
Colour of Candlestick
The colour of a candlestick plays very a major role in reading the sentiment of the market. If most of the candles are green in colour, the market is in a bullish trend. If most of the candles are red in colour, the market is in the bearish trend.
Shape of Candlestick
The shape of a candlestick plays a very important role in identifying the force behind the bullish or bearish trend. If the body of the candlestick is wide, there a is strong bullish force(if the candle is green). If the body of the candlestick is not wide and the shadows are long, then there is a tug of war between bulls and bears and the trend is not clear.
Understanding Candlestick Chart
The chart of financial security on which the data is represented in the form of candlestick patterns is called Candlestick chart. After the origination of Candlestick chart, the form of charts like line chart, area chart, OHLC bar chart etc. are used less.
The Candlestick Chart is better than the other form of charts because they look attractive due to shapes and colour of candles. They tell the real picture of market sentiment. Different candlestick patterns show the supply and demand of the market in a very easy way to understand.
Significance of Candlestick Patterns
Candlestick Patterns help you to see the trend of the market. There are various types of candlestick patterns which show the trend reversal and trend continuation points by which you can predict the upcoming trend easily.
These patterns also show the momentum of the trend which is not possible by the other form of charts. The momentum of the prevailing trend is directly proportional to the size of the body of a candlestick. That means the larger the body of the candle, the stronger is the momentum and vice versa.
These patterns also show the supply and demand conditions of the market which make them unique. There are certain patterns which show that whether is supply is overcoming the demand or demand is overcoming the supply.
Limitations of Candlestick patterns
Trading is full of probabilities and there is no holy grail in the world of trading. Candlestick patterns are better than the other form of chart types but they also have few limitations. A good trader is one
who knows his limitations well.
Conclusion
Candlestick Patterns are the best way to read the market sentiment of the market. These patterns are widely used. They have revolutionised the approach of Technical Analysis. After the origination of Candlestick patterns, it has become very easy for the traders and investors to read the market.
These patterns help you to determine the trend, momentum and supply & Demand conditions of the market. They work across all the time frames like yearly, monthly, weekly, daily, hourly, 5-min chart etc.
