Introduction to Candlestick Charts
Candlestick charts are used to display information about an asset’s price changes. This method of representation was popularly used in Japan in the 1700s before other forms of charts like the bar and point and figure charts were developed.
Candle charts are often used by traders to determine the changes in price of the asset based on the past patterns. It is one of the popular components of technical analysis which makes it possible for the traders to interpret price information quickly.
Candlestick charts show four price points— open, close, high and low; this helps the traders in the trading process. These are represented on the candlestick charts by certain components of the candlesticks which include the body, the wick and the colour. The body represents the open to close range, wick represents intraday high-low and the colour indicates the direction of the market’s movement— the rise in price is indicated by a white or green body and a decrease in price is indicated by a red or black body.
There are various patterns of the candlestick charts that help the traders to determine the movement of the market in change in the price of assets. These patterns indicate opportunities in the market and also provide insight into the balance in the market.
For new traders, it is important to understand the candlestick patterns and get familiar with them before entering the trading world.
Patterns of Candlestick charts
After a downtrend in the market, the change in prices or price reversals can be indicated by six bullish candlestick patterns, which are as follows:
- Hammer
- Inverse hammer
- Bulging engulfing
- Piercing line
- Morning star
- Three white soldiers
Similarly, after an upward trend in the market, the change in prices is indicated by six bearish candlestick patterns which are as follows: - Hanging man - Shooting star - Bearish engulfing - Evening star - Three black crows - Dark cloud cover
In addition to the bullish and bearish candlestick patterns there are also four continuation patterns. These are the patterns that do not indicate the movement of the market but help the traders to identify a period of rest in the market when there is indecision and the price movement is neutral. These continuation patterns are as follows:
- Doji
- Spinning top
- Falling three methods
- Rising three methods
So to conclude, candlestick charts help the traders to identify the price reversals in the market and also to determine when the market is at rest. As a new trader, understanding these candlestick patterns will help you a great deal in trading.
