- Candlestick charts are commonly used for technical analysis to observe prices and analyze the different price data that is available to traders.
- Candlesticks display the high, low, open, and closing price.
- There are many different types of candlestick patterns, many not even explained here. A future article will go over those patterns. This article was just to explain the parts of a candlestick.
- Engulfing candles are powerful reversal indicators.
What are candlestick charts?
Candlestick charts are commonly used for technical analysis to observe the prices and analyze the different price data that is available to traders. Candlestick charts are basically a combination of a line chart and a bar chart. The candlesticks display the high, low, open, and closing price. It originated from Japanese origins, with traders tracking market prices first.
The basic part of a candlestick is the rectangle part, which is known as the “Real Body,” with the extended line on top, bottom, or both. The real body is what displays the range between the open and the close price of that period(could be timeframe). The candlestick shadow shows the daily high and low and how they compare to the open and the close. Another way that the shadows are known is as the wick.
- A green real body indicates that the candle is trading higher than the opening price and is also known as a bullish candle stick.
- A red real body indicates that the candle is trading lower than the opening price and is also known as a bearish candle stick.
Candlesticks also have their own names depending on the structure.
DIFFERENT TYPES OF CANDLESTICKS:
- 1. Doji candles: DOJI candles are candlesticks that show that there is indecision between buyers and sellers. It has an open and close price that is almost the same, is basically neutral, and provides little to no information about the market. After these DOJI candles, big moves can, however, happen.
- 2. Shaved bottom: Shaved bottom candles are candlesticks that show a bullish or bearish candlestick with a small body near the candle’s low, with no tail and a long head. It is considered a bullish pattern only when the interval’s opening price is also its lowest price. If the interval’s closing price is also its lowest point, the candlestick is bearish.
- 3. Shaved head: Shaved head candles are candlesticks that have no head on them. It can be bullish or bearish with a small body at a candle high with no head and a tail. It is considered a bullish pattern when preceded by a downward trend, when the market is oversold or at a point of support.
- 4. Grave stone: A gravestone candle is a bearish pattern and suggests a reversal is possible. For it to be identified, there should be a small tail. This candle shows that bulls tried to push the price to highs, but there was too much selling pressure from the bears, so the bulls lost momentum. It is usually found at the end of a downtrend since it is mostly a reversal signal.
Bullish and Bearish Engulfing Candles
A bullish engulfing candle is a candle with a strong possibility of a change in the trend or direction. For a candle to be engulfed, the second candle’s body must “engulf,” or completely cover the prior candle. These types of candles would indicate a strong trend reversal. An engulfing candle in an uptrend would be a bearish engulfing candle, which could indicate that the uptrend will end, and in a downtrend it could indicate that the downtrend will end.
A bullish engulfing candle would mean a bullish candle with a body that covers the previous red candle. This candle could indicate that a reversal is near and a strong move is about to happen. Like the bullish engulfing candle, the bearish engulfing indicates the reversal of an uptrend.
Bullish and Bearish Harami Candles
The Harami candles are used to identify trend reversals or extensions. It consists of two candles, like the engulfing candles. “Harami” comes from the Japanese word for “pregnant”, which is reflected in the Harami Candle. It can be used for both bullish and bearish scenarios depending on what the trend is.
A bullish Harami candle consists of a bearish candle with a large candle first, followed by a bullish candle with a small body the size of the previous candle’s real body.
A bearish Harami candle consists of a bullish candle with a large bullish candle first, followed by a bearish candle with a small body the size of the previous candle’s real body.
The role of Emotion in trading
In trading, emotion makes up most of the market. The price at the end of the day is ultimately determined by supply and demand, which is heavily impacted by our emotions. People and the entities with the large liquidity that moves the market also have emotions, and the masses have emotions. Candlesticks help us see what emotions traders have.
If you want to learn more about the role of emotions in the market, check out the three phases, contraction, expansion, and trend which will change the way you view the financial markets.