Candlestick Basic -Chart Patterns

Candlestick Basic

Introduction

In the 1700s, a legendary Japanese rice trader named Homma used trading techniques that eventually evolved into the candlestick techniques that technical analysts on the Japanese stock market used in the 1870s. Steve Nison introduced these techniques to the Western world in his first book, Japanese Candlestick Charting Techniques.

The advantage of using candles on charts is that single or multiple candle patterns give earlier and more reliable reversal signals. Every candle shows the activity for the referenced period in hourly, daily, or weekly charts, for example.

 Figure 6.1: Horizontal reference points of the candlestick.

In figure 6.1, the horizontal reference points of the candle represent the opening price, the highest price, the lowest price, and the closing price of the considered period. The rectangular portion of the candle, or the body, represents the range between the opening and the closing prices. If the closing price is higher than the opening price, the body is white (not filled). If the closing price is lower than the opening price, the body is black (filled).

Figure 6.2: Candlestick naming.

A candle consists of either just a body or a body with an upper and/or a lower shadow. A candle with an opening and closing price at almost the same price level is called a doji (figure 6.2). The candlewicks are called shadows, and they extend up to the highest price and down to the lowest price of the related period. Candlestick charts can be used in any time frame, including minutes, hours, days, weeks, or months.

Candlestick chart patterns are formed by one or more candles; they indicate a short-term trend reversal or a trend continuation. You must always take into account the previous trend when interpreting candlestick patterns. Candlestick patterns do NOT give price targets!

Format, Naming, and Meaning Candlesticks Format Overview

Format description:

Sr.	Name	Interpretation
1	Big white body (White Marubozu)	Very positive
2	Big black body (Black Marubozu)	Very negative
3	White opening Marubozu	Quite positive
4	White closing Marubozu	Positive
5	Black closing Marubozu	Negative
6	Black opening Marubozu	Quite negative
7	White candle	No direction
8	Black candle	No direction
9	Dragonfly doji	Reversal?
10	Doji star	Reversal?
11	Gravestone doji	Stable/Reversal
12	Long-legged doji	Reversal?
13	Four price doji	Reversal?
14	Hammer (white) Hanging man	Bottom reversal Top reversal
15	Hammer (black) Hanging man	Bottom reversal Top reversal

Psychological Background 

Candlesticks psychological background 1.

 










The candlesticks demonstrate the psychological trading that takes place during the period represented by a single candle.

Candlesticks psychological background 2.

 Rising power candles ------------------

Some candles with falling power ---------------

Candles with reversal power -------------------

 Important  Main  Factor 

• A big white body means buyers are in power, and the trend is up.
• A big black body means sellers are in power, and the trend is down.
• A small body means that buyers and sellers are trying to take power.
• A big shadow below is a positive sign and indicates strength.
• A big shadow above is a negative sign and indicates weakness.
• A doji is a candle with opening and closing prices that are close together.
• A doji means that price acceleration is slowing down and that bulls and bears are in balance.
• A doji at a top or bottom often is the first signal of a price reversal.

 

Candlestick Patterns

The power of Candlestick Charts is with multiple candlesticks forming reversal and continuation patterns. These candlestick patterns given below:

 

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