It is extremely important to have a basic understanding of candlestick charts to help us in quickly understanding the direction of price movement.
Under technical analysis, candlestick charts are one of the most efficient ways to analyse the change in the prices of an asset.
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For a trader, two of the most favourite features of candlestick charts are:
Each candlestick shows the completion of the specific number of trades during a particular period.
It also shows that if there was more selling pressure or buying pressure during that particular period.
In this blog, let us discuss in details about candlestick charts and how to analysis them while trading:
|Table of Contents|
|Origin of Candlesticks|
|Formation of Candlesticks|
|Interpreting Patterns on Candlestick Charts|
|Three Assumptions while analysing the Candlestick Charts|
Origin of Candlesticks:
Japanese candlestick charts are the oldest type of charting technique used to analyse the future price movement.
In the 1700s, the earliest forms of candlestick charts were used to predict rice prices.
In 1750, a Japanese merchant by the name of Munehisa Homma started using his candlestick analysis to trade at the Rice exchange at Sakata.
Suggested Read: All you need to know about the Japanese Candlestick
Formation of Candlesticks :
Each candlestick is mainly made up of real body and wicks also known as shadows or tails:
Suggested Read: How Heikin Ashi charts help to filter the trade
Suggested Webinar: Trend Following with Heikin Ashi Candlesticks
Interpreting Patterns on Candlestick Charts:
As candlesticks are more appealing, the trader looks for candlestick patterns which can be continuation or reversal.
These candlestick patterns can also be classified into bearish and bullish candlestick patterns.
The candlestick patterns can be a single candlestick pattern or may be formed by grouping two-three candlesticks.
Some of the examples of such candlestick patterns are:
Example of single candlestick pattern:
Multiple candlestick patterns are formed by multiple candles.
Example of multiple candlestick patterns:
o Bullish Engulfing
o Bearish Engulfing
o Bullish Harami
o Bearish Harami
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Three Assumptions while analysing the Candlestick Charts :
1. One should buy strength and sell weakness:
Strength is usually represented by a bullish (green) candle whereas weakness is represented by a bearish (red) candle.
One should usually buy on a green candle day and sell on a red candle day.
2. One should be flexible with patterns:
There could be minor variations to the pattern because of market conditions.
Therefore, one should be a bit flexible when analysing these candlestick patterns on the charts.
3. One should look for a prior trend:
The prior trend should be bearish when looking for a bullish candlestick pattern and similarly, the prior trend should be bullish if you are looking for a bearish pattern.
Candlestick charts are a type of technical charts which analyses further price movement similar to the bar charts or line charts.
Each candlestick is mainly made up of real body and wicks also known as shadows or tails.
The opening price of the asset > closing price = Open will be at the top of the candlestick body.
The closing price of the asset > opening price = Close will be at the top of the candlestick body.
As candlesticks are more appealing, the trader looks for candlestick patterns which can be continuation or reversal patterns.
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