Japanese Candlesticks, as the name suggests, were first invented by the Japanese rice traders during 1600 to predict price movement of rice. Steven Nison was credited for popularizing it later. To some traders, candlesticks create so many signals, these appear mystical to them. Proper knowledge and candlestick chart pattern analysis can help traders a lot. Through this article, it will be our endeavor to focus on the basics of candlestick chart so that our readers can take up further studies into the advanced candlestick analysis.
Candlestick chart pattern analysis and interpretation – As shown in the figure above, in general, when opening price is well below closing price, the candlestick shows a bullish pattern and inversely, when closing price is far below the opening price for a particular period of time, the candlestick gives a bearish signal. Highest price and lowest price in that particular period from the tails/ shadow and the price difference in opening and closing price forms the body of the candlestick. The candle sticks can be of any time frame – one tick, 1 min., 5 min., 15 min., daily, weekly, monthly, yearly.
Patterns – Candlestick chart pattern analysis highlights the following important patterns.
Engulfing – It is a strongly bullish pattern if it occurs after significant down trend. It is characterized by small bearish candle followed by a large bullish candle which is essentially much bigger than the bearish candle.
Hammer – It is a bullish signal if occurs after a significant downtrend. It is characterized by short body followed by a long lower shadow indicating a significant lowermost point. The upper shadow is non-existent or insignificant.
Harami – It means ‘pregnant’ in English. The pattern indicates a decrease in momentum. Here a large candle is followed by a small candle showing opposite momentum indicating a loss of momentum of the trend. If a bearish candle is followed by small bullish candle, as shown in the figure, it indicates a drop in downtrend momentum and opposite signal occurs if reverse candles are formed. It is also seen as the start of a reversal of trend if followed by other supporting signals.
Piercing – It is a bullish pattern. The first candlestick is a long bearish candlestick followed by a long bullish candle. The second candle or bullish candle opens lower than the low of the first bearish candle but closes above the halfway mark of the body of the first candle.
Doji – Doji implies indecision among traders meaning traders are not following a particular trend. The opening price and closing prices are nearly same highs and lows are away. Doji, when combined with other patterns gives different signals. There are also many variations of Doji.
Candlestick chart pattern analysis can continue this discussion for pages because we can create many candlestick combinations that give different signals under different circumstances. There are also advance candlestick patterns like Renko, Heiken Ashi and such. But I would like to conclude here with a promise of coming back in future with further discussion on candlesticks. Happy Trading!
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Partha, an engineer by education, is theoratically actively following the stock and commodity markets since 1990. He is an active trader since 2003. He has received formal education in future and options and quantum analysis. He is presently working on research oriented projects using Python and data analytics.