Candlestick charts are widely used in trading because of their ease of use. You can look at the candlestick for a certain time period and immediately discern whether the price closed up or down for that period.
A candlestick, or Japanese candlestick, is just a picture of the price.
There are 4 components that make up a Japanese candlestick.
The body of a candlestick is typically red or green. If the price opened lower and closed higher, the candlestick will be green, however if the price opened higher and closed lower, the candlestick body will be red. The colored area of a candlestick is called the body.
The shadow, either above, below, or both, is called the wick. If the price reached high then dropped back, there will be an upper wick and vice versa for a lower wick. The opening price and the closing price make up the body, while the high and low make up the wick.
It is possible for a candlestick to have neither a body nor a wick if the price does not move at all, or if the price ends where it started.
There are certain common candlestick patterns that give a clue to where the price may go.
A Doji is most likely the easiest candlestick pattern to spot. It is made when the open and close are the same or very close. It looks like a cross and it is a major sign of a stalemate between bulls and bears.
A Marubozu candlestick is formed when the bulls or bears control the price for the entire time period. A red marubozu means the bears pushed the price lower for the entire period until the close. A green marubozu means the bulls pushed the price higher for the entire period until the close.
Hammer and Hanging Man
The Hammer is a bullish reversal pattern. When found in a downtrend, it signifies an exchange of power over to the bulls.
The Hanging Man is a bearish reversal pattern. When found in an uptrend, it signifies the exchange of power over to the bears.
Hammer Bullish Reversal Pattern
Hanging Man Bearish Reversal Pattern
Inverted Hammer Bullish Reversal Pattern
Shooting Star Bearish Reversal Pattern
Inverted Hammer and Shooting Star
The Inverted Hammer is a bullish reversal pattern. When found in a downtrend, it signifies an exchange of power over to the bulls.
The Shooting Star is a bearish reversal pattern. When found in an uptrend, it signifies the exchange of power over to the bears.
There are more advanced two-stick patterns and even three-stick candlestick patterns that can provide a more accurate prediction on where the price may go. These advanced candlestick patterns are generally made up of one or more of the simple candlestick patterns shown here.
Users of advanced candlestick patterns may also be inclined to use Japanese Heiken Ashi candlestick charts. Heikin-Ashi (Japanese for ‘average bar’) candlesticks are a weighted version of candlesticks.
Candlestick charts are widely used by traders for their ability to tell a story relatively quickly. By looking at a candlestick chart a trader is able to see if the bears or bulls won.