Candlestick charts are commonly used in trading because they pack a lot of information in a easy-to-read design. They tell you more information than line charts, and with a single candlestick, you can see the opening, closing, session high and session low price. Continue reading to learn how to read them, and see a few bullish and bearish chart patterns.
What are Candlestick Charts?
Candlestick charts are a simple way to convey stock’s open, close, high and low price for the specific time frame chosen. Also known as Japanese candlesticks, they originated in the 1700s to display the emotion of traders. Today, traders use candlestick charts to see price movement, find patterns and determine what price a stock may be headed toward.
Candlesticks have two main parts: the real body and the wick/shadow. This helps traders see the most information, rather than a single plot point. The time frame depends on the time frame you select. For example, if you choose a 1-minute chart, a new candle will generate every minute. The open and close prices the candle shows are for the time period you select, not the overall session.
The Real Body
The real body is the wider portion of the candlestick, showing the range between the opening and closing price of the session.
The open and close place will be the top or bottom of the real body, depending on if the stock moves higher or lower in the selected time period. A small real body means that the price change was minimal, while a large real body means significant price change happened.
A filled-in candlestick (usually red or black) means the closing price was lower than the opening price. An unfilled candlestick (or filled in white or green), means the closing price was higher than the opening price.
A white, unfilled or green candle shows that the price closed higher than the open at the end of the session, making it a bullish candle. A black, filled, or red candle shows that the price closed lower than the open, making it a bearish candle.
The thin line above and below the real body are known as the shadow or wick. This line represents the high and low of the day.
If there is no line above or below the real body, it means the high or low was the same price as the open or close.
Candlestick Chart Patterns
There are a ton of candlestick chart patterns, but we’ll go over just a few to get you started.
Single Candlestick Patterns
Doji candlesticks are a single candle pattern. Dojis occur when the price closes at the price it opened at for the time period. It doesn’t have a real body, and the candle is not bullish nor bearish.
Doji candlesticks may be an indicator of a price reversal.
Spinning tops are symmetrical single candle patterns where the wicks/shadows are in, or close to, equal size and a small real body with only a small price difference. This pattern shows indecisiveness between bull and bear traders of the stock. The open and close prices are very similar. Spinning tops may signal trend changes.
Hammer candles are a single candlestick pattern. Hammer candles one long wick and a small real body at the other end. Hammers may also signal a price reversal.
A Hammer candlestick usually appears during bearish trends.
Multiple Candlestick Patterns
Bullish engulfing patterns are a two candle pattern that occurs when the bulls outbuy the bears. This could signal an increase in a price change.
Bearish engulfing patterns are a two candle pattern that occurs when the bears outsell the bulls. This could signal a decrease in a price change.
Three White Soldiers
This three candle pattern consists of three long white candles and usually appears after a downtrend. Three white soldiers consecutively open higher than the previous open.
Three Black Crows
This bearish pattern occurs when three black candles appear consecutively. The candles close lower than the previous period’s candle and usually signifies a reversal.
This three candle pattern consists of a long black candle followed by a short real-body candle and a long white candle. This may indicate an increase in price.
These three candle patterns typically indicate a trend reversal. Evening stars consist of a large white candlestick followed by a small real-body candle and long black candle.
Final Thoughts About Candlestick Charts
Candlestick charts are a great way to easily get an idea of a stock price and its current trend. You can determine what time period you want your chart to be in, and can easily the high, low, open and close price for the given session.
Candlestick charts can also be used in pattern analysis, and there are a ton of different chart patterns that can indicate where a stock price might be heading next.
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