Table of Contents
What are the Basic Features of Candlestick Charts?
What are the Different Types of Basic Candlestick Patterns?
A Candlestick chart is a form of price chart employed in technical analysis, presenting a security’s open, close, low and high prices for a designated timeframe. Its roots trace back to Japanese rice traders and merchants who utilized it to monitor market prices and daily trends centuries ago, long before it gained popularity in the United States. Read and get a proper idea about Candlestick charts, the basic features, basic patterns, different types of basic candlestick patterns and more.
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Candlestick Chart: Definition
A Candlestick chart serves as a method for representing data regarding the movement of an asset’s price. Among the most widely used tools in technical analysis are Candlestick charts, which offer traders a rapid interpretation of price data based on just a few price bars.
The central portion of the Candlestick chart is known as the “real body,” serving as a signal to investors about whether the closing price exceeded or fell below the opening price. It is depicted as white/green for a higher closing and black/red for a lower closing.
Centuries back, just as Japanese rice traders uncovered, the emotions of traders significantly sway the movement of assets. Today, Candlesticks serve as a tool for traders to fathom the sentiments driving an asset’s price shifts. They hold the belief that the distinct Candlestick patterns suggest the potential direction of the asset’s price in the future.
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What are the Basic Features of Candlestick Charts?
Candlestick charts encompass three fundamental features:
- Body: This element symbolizes the range between the opening and closing prices.
- Wick (Shadow): A vertical line that portrays the highest and lowest points within the trading day.
- Color: The color of the Candlestick chart provides insight into market direction. A red (or black) body denotes a decrease in price, whereas a green (or white) body signifies a rise in price.
Over a period of time, individual candlesticks amalgamate into patterns that traders can utilize for identifying significant support and resistance levels. A wide array of candlestick patterns exists, each signaling potential opportunities, in a market. Some of these patterns offer insights into the equilibrium between buying and selling forces, while others pinpoint instances of market indecision or continuation patterns.
What are the Different Types of Basic Candlestick Patterns?
Candlesticks originate from the upward and downward shifts in prices. Although these fluctuations may seem haphazard, they frequently arrange themselves into patterns that traders employ for analysis and trading intentions.
These patterns can be classified into two main groups: bullish and bearish. Bullish patterns suggest a probable price increase, whereas bearish patterns suggest a probable price decrease. However, it is important to note that no pattern is infallible, as candlestick patterns reflect tendencies in price movements rather than certainties.
The different types of basic candlestick patterns include:
Bearish Engulfing Pattern
​A bearish engulfing pattern in Candlestick charts emerges during an uptrend when the number of sellers surpasses that of buyers. This is depicted by a substantial red (or black) real body completely covering a small green (or white) real body. This pattern suggests a shift in control towards the sellers, potentially leading to a further decrease in price.
Conversely, a bullish engulfing pattern forms on the bullish side of the market when buyers take the lead over sellers. This is illustrated on the Candlestick chart as a lengthy white real body engulfing a minor black real body. With the buyers exerting more influence, this pattern implies a potential upward movement in price.
Bearish Evening Star
An evening star is classified as a topping pattern, distinguished by the final candle within the formation initiating its opening beneath the small real body of the preceding day. This small real body is capable of being either black or white (also referred to as red or green). The concluding candle concludes its session significantly within the real body range of the candle from two days prior.
This pattern illustrates a notable slowdown in buyer momentum, often leading to a shift in control towards the sellers. This shift might potentially lead to further selling activity. Conversely, the morning star presents the bullish counterpart to the evening star pattern.
Bearish Harami
A bearish harami pattern is characterized by a relatively small black or red real body that is entirely encompassed within the previous day’s larger white or green real body. While not necessarily a signal for immediate action, it does merit observation. This pattern reflects uncertainty among buyers. Should the price continue to rise subsequently, the overall uptrend might remain intact. However, the appearance of a downward candle after this pattern suggests a potential decline.
Conversely, the bullish harami in Candlestick charts presents the opposite scenario to the bearish harami. It arises within a downtrend when a compact real body (green or white) forms within the confines of the preceding day’s larger real body (red or black). This signals a temporary pause in the prevailing trend. Should a subsequent up day follow, it could imply the possibility of further upward movement.
Bearish Harami Cross
A bearish harami cross materializes during an uptrend, wherein an upward candle is succeeded by a doji—a candlestick with an open and close that are nearly identical. This doji finds itself situated within the actual body of the preceding session’s candlestick. The implications mirror those of the bearish harami pattern.
Conversely, a bullish harami cross emerges in a downtrend, featuring a downward candle followed by a doji. The doji, once again, is encompassed by the real body of the previous session’s candlestick. The resulting implications align with those of the bullish harami pattern.
Bullish Rising Three
This pattern initiates with what is referred to as a “lengthy white day.” Subsequently, during the second, third, and fourth trading sessions, diminutive real bodies drive the price downward, yet it remains contained within the price range of the initial extended white day (day one within the sequence). The fifth and ultimate day of the sequence manifests as yet another lengthy white day.
Despite the pattern illustrating a three-day descent in prices, no fresh nadir is evident, prompting bullish traders to make arrangements for an impending upward maneuver. A minor deviation of this pattern arises when the second day slightly gaps up subsequent to the initial extended upward day. All other aspects of the pattern remain unchanged, resulting in a slightly altered appearance. This particular modification is referred to as a “bullish mat hold.”
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Bearish Falling Three
The pattern initiates with a notable bearish day. Subsequently, three consecutive days feature modest bullish price movements, yet they remain confined within the boundaries of the initial significant bearish day. The culmination of this pattern on Candlestick charts occurs when the fifth day experiences another substantial downward shift. This pattern signifies the resurgence of sellers’ dominance and suggests the potential for a further decline in price.
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Conclusion
A Candlestick chart is a potent tool in technical analysis, revealing an asset’s open, close, high, and low prices over a designated timeframe. Reflecting traders’ emotions that sway asset movement, candlesticks aid in deciphering sentiments driving price shifts. Candlestick charts encapsulate vital features—body, wick, and color—forming patterns that help traders identify support, resistance, and more. While not infallible, these offer insights into market dynamics and potential opportunities, remaining a cornerstone of technical analysis.
