A candlestick is a graphic illustration of the price fluctuations of an item over a particular time frame.
Candlestick charts are essential in the field of technical analysis because they allow merchants to rapidly
interpret price swings, patterns, and market sentiment, allowing them to make informed decisions. A
trading chart contains so much more information than what meets the eye. A conventional trading chart is made up of multiple candlesticks that combine together to depict the overall movement of prices, but
examining each candlestick at a more detailed level reveals a whole new tale.
THE BASICS OF A CANDLESTICK
The shape of candlesticks varies, and it’s based on the relationship that exists between the day’s high
prices and low prices, the opening prices and the closing prices.
THE MAJOR PARTS OF A CANDLESTICK
There are four main points that make up a candle stick, and these are the open, the closed, and the wicks.
Depending on how you set your chart, the candle colors will turn green or blue if the open price is just above the open. It turns red, however, if the closing price is lower than the open price.
Open price: The open price indicates the price that was traded first when a new candle was forming.
High price: This normally appears at the tip of the upper wick. But if there is no high wick, then the highest price represents the closing price, or the price of a bearish candle within a bullish candle.
Close price: This is the last price that was traded when the candle was forming.
Low price: This is the lower end of the wick, and in scenarios where the lower wick doesn’t exist, the low
price is perhaps the open price of a bullish candle or the closing price of a bearish candle.
These four elements can be found on any candlestick, though their placement varies based on whether the candle in consideration is a “bullish” (upward moving) or a “bearish” (moving downwards) candle.
CANDLESTICK PERFORMANCE AND PATTERNS
The first time the performance ranking for candlestick patterns was developed in 2008 by Thomas
Bulkowski; this contained two types of statistics that you can expect from a pattern.
• Reversal – This pattern shows the direction that a change in price is taking.
• Continuation – This is a continuation pattern that can predict an extension in the current price
WHY DO TRADERS PREFER USING CANDLESTICK CHARTS?
Candlestick charts are famous amongst FX traders, commodities traders and more. One of the main
reasons for this popularity is that the charts are visual. This means that they are attractive for the users, and the information that the users are searching for can be obtained effortlessly. These charts highlight the open as well as the close of various time periods in a more distinct way than other kinds of charts, which include the line chart or bar chart.
Candlestick charts offer certain benefits, among them:
• FX movements are easily understandable on candlestick charts when compared to others.
• It’s easier to recognize the price patterns as well as price action on a candlestick chart.
• These charts offer more information in the form of prices than a line chart offers. This includes high,
low, open, and close.
WHAT ARE THE AVAILABLE TYPES OF CANDLESTICKS?
Although there are different kinds of candlesticks, they all fall into one major category: Japanese
candlesticks. The best thing about Japanese candlesticks is that they are very dense and packed with lots
of information. They have been designed to indicate the market psychology, depicting sellers’ as well as
buyers’ emotions. Japanese candlesticks can help you while analyzing the current price patterns and also
those of equities. Also, you can use the charts for any forex time frame.
CANDLESTICKS OFFER A LOGICAL WAY TO MAKE TRADING DECISIONS
For all purposes and intents, candlesticks are merely the reaction of traders to what is happening in the
market at any given time. Human beings tend to react to situations occurring en-masse, and this is one of
the reasons that has allowed candlestick chart analysis to work.
To make proper decisions, traders need to know what has been happening in the market. But traders need to remember that a pattern has one candlestick, but there may be several candlesticks over several days of trading. Conversely, a reversal candle pattern represents a series or a number of candlesticks that would normally show a reverse trend in a commodity or stock that are being analyzed.
However, determining trends without the right tool to use can be a herculean task. One of the
characteristics that analysts use to analyze a pattern is either being bearish or bullish. This analysis is done
based on the market that came before the pattern. With the right analysis, traders know that they can be
guided in making proper trading decisions. The actions which they will take will be purely based on data,
and they can trade confidently knowing that they are doing the right thing.
There cannot be a bullish reversal pattern when there is an uptrend. There are instances where you may
have several consecutive candlesticks that look like a bullish pattern, but if the trend is going upwards, then that cannot be regarded as a bullish Japanese candle pattern. Likewise, there cannot be a bearish-reversal candle pattern where there is a downtrend.
TYPES OF JAPANESE CANDLESTICKS
There are many types of candlesticks, and each of them is used to indicate movements in the FX market.
Remember that it is almost impossible for a trader to understand all of them, and for those who are very
interested in learning them all, it will take some time. Here are 24 popular types of candlesticks that are
mostly used by both currency and equity traders today.
This type of candlestick occurs mostly when the market is experiencing indecision. It forms when both the
opening and closing prices are quite similar. However, if this is the case, the length of the lower and upper shadows may be different. The shape of a Doji may be that of a cross, a plus sign, or inverted crosses. Examples of Dojis include tombstones, flying dragons and more.
There are candlesticks that have a short body and whose upper and lower shadows are long, exceeding the body’s length. These highs show the indecisiveness of the traders.
3. SHORT CANDLESTICK
This kind of candlestick displays minimal price movements that indicate a possible consolidation.
4. LONG CANDLESTICK
This is a candlestick that has a short shadow and a long body. Its appearance shows that the market’s evolution lacks direction.
This is one of the few Japanese candlesticks that don’t have a shadow. It suggests that there is a strong bearish or bullish trend.
This candlestick type appears to be isolated from previous price actions. It starts with a star position and ends with a gap. It is one of the easiest patterns to read.
A hammer is a reversal trend that appears in a downward trend. This candlestick has an appearance that resembles a square lollipop that has a long stick.
8. SHOOTING STAR
This one resembles an inverted hammer and appears only in an uptrend. It consists of a long upper shadow, a bullish gap, and a small body. It also closes near the opening price.
9. INVERTED HAMMER
This is a reversal pattern that is composed of a first candlestick. It’s got a long black body and a second one that has a long upper shadow and a smaller body.
10. TAIKI’S BULLISH GAP
This candlestick has a continuous pattern that consists of a black candlestick followed by one that opens after the appearance of a bearish gap. Interestingly, the third candlestick opens inside the body of the second candlestick, and then closes within the gap. But with all this happening, the gap will not be closed.
11. HANGING MAN
This is a reversal pattern that takes the form of an uptrend and looks like a square lollipop that has a long stick.
12. EVENING DOJI STAR
This is a reversal pattern that is made up of three candlesticks; the first being bullish, the next one being a doji, and the last one closing just below the midpoint of the very first candlestick. The configuration is more strong and solid when compared to the evening star.
13. TASUKI BEARISH GAP
This is a pattern that is continuous in nature and consists of a white candlestick, followed by a second one that opens just after the appearance of the bullish gap. The third candlestick opens inside the body of the second candlestick but without closing the gap.
This reversal pattern is bearish and comes at the end of an uptrend. It is said to engulf because it appears at the end of an upward trend and also at the end of a downward trend, engulfing all of them.
15. ABANDONED BABY
This is where a gap is followed by a doji, then another gap, but in the opposite direction. The shadows created by the doji should be totally different from the shadows that the first and third candlesticks create.
16. MORNING DOJI STAR
This is another reversal pattern that is more similar to the morning star. The first candlestick has a downward trend and has a long body. The second one opens just after the bearish gap, with a doji that has small shadows. The last one will close above the center point of the candlestick that comes first.
17. THREE BLACK CROWS
This candlestick pattern reverses a bearish trend and is made up of 3 consecutive long black bodies that open inside the body of the former candlestick while closing near the lowest point of the period.
18. EVENING STAR
This one forms in an uptrend, forming a reversal pattern. There is the first white candle that is followed by another white or black candlestick that opens just after a bullish gap. The third one opens after the bearish gap has opened and closes right below the middle point of the candlestick that comes first.
19. THE MORNING STAR
Thus, the reversal pattern consists of three candlesticks. The first of them has a long body, which pushes the bearish trend further. This is followed by a second one that has a white or black body and opens after the appearance of a bearish gap.
20. TWENTY-THREE METHODS
This pattern is a continuation of the bearish pattern and has a long black body that is followed by 3 small white or black candlesticks that are fully within the first one’s range.
21. RISING THREE METHODS
This is a bullish pattern that’s continuous, starting with a long white pattern and three white or black candlesticks that are all contained within the range of the first three candlesticks.
This is another popular reversal pattern that forms when there is a downward trend. It has a long black body that is followed by another candlestick that opens at a new low. Moreover, this pattern closes just above the midpoint of the candlestick that appeared first.
23. THREE WHITE SOLDIERS
The three white soldiers represent a bullish trend that has three white bodies appearing consecutively, and which opens in the prior body and very close to the end of the high period.
24. DARK CLOUD
This represents a reversal pattern, which forms in an uptrend and with a white long body, which is followed by a candlestick that opens where there is a new high and just below the midpoint of the candlestick that appeared first.
THE BOTTOM LINE
Candlestick patterns capture the attention of FX traders, but a majority of the continuation and reversal signals that are emitted by these patterns were said not to be working effectively in the modern trading environment since they are electronically controlled. Luckily, statistics that have been provided by Thomas Bulkowski exhibit an unusual level of accuracy that allows for a narrow selection and usage of these patterns, and this offers traders buy and sell signals that they can act on. In this article, we have covered many types of candlestick patterns (24 to be exact) and their characteristics. Due to the large number, it will take some time before you master them all. As an FX trader, you can master a few of them and apply them to your everyday trades.