A candlestick chart, also referred to as bar chart, is used to describe and understand price movements of a security over a specified period of time. The candlestick chart is a combination of line and bar charts and is considered as one of the easiest forms of illustration that can be used and understood by even the most inexperienced investor when analyzing investment opportunities. In order to analyze a candlestick chart, you need to be familiar with basic candlestick layout and patterns, which are highly useful aids in stock, FOREX, commodity, and trading decisions. A candlestick chart is formed by a void or filled portion of the candlestick, which is called the body or real body. The thin lines above and below the body signify the high and low ranges, which are referred to as shadows and also called wicks or tails. The bottom of the body stands for the opening price and the top of the body signifies the closing price. The top and bottom tips of each tail are the day’s highest and lowest prices, respectively. Understanding the following formations will help you analyze a candlestick chart.
- Black and white candlesticks. Black candlesticks signify a downward movement for the day whereas white candlesticks represent the opposite. If the closing price is lower than the opening price, the main body will be filled with black. If the closing price is higher than the opening price, it will be white.
- Long lower and long upper shadows. Long lower shadow represents bullish signal and long upper shadow represents bearish signal. Bulls and bears are metaphors for the market trend. A bull market corresponds to increased investor confidence and expectations of increased capital gains. Bear market is the condition when investors anticipate losses, and pessimism grows because prices of securities are falling.
- Hammer and inverted hammer. A bullish pattern during a downward movement displays a long, lower tail with a small or no body. Shaven head, which has no upper tail, represents a bullish pattern during downtrends and a bearish pattern during uptrends. Inverted hammer signifies reversal. Shaven bottom represents bottom reversal; and shooting star with a small body, long upper tail, and a small or no lower tail represents a bearish pattern during uptrends.
- Spinning top. This formation is used to signify neutral pattern regardless of a wide range of price movement in a trading day. This pattern usually represents indecision about the future status of an underlying asset.
- Doji. This formation is another neutral pattern, which appears when a security’s opening and closing prices are practically equal. The length of the upper and lower wicks may vary and the candlestick may form like a cross or plus sign.
- Marbozu. The form of the candlestick has neither upper nor lower tails during prolonged bullish trends and it is white. It is black during prolonged bearish trend with neither upper nor lower tails as well.
When learning to analyze a candlestick chart, do not get overwhelmed with the varying candlestick patterns. Try to get a grip on the opening prices, closing prices, high and low prices, directions of the candle, and ranges of the candlestick. By mastering the basics you can improve your candlestick analysis by using candlestick software and getting more acquainted with candlestick trading or candlestick stock.