Candlestick patterns and charting is a prevalent form of technical analysis that was designed in Japan hundreds of years ago. Candlestick charts represent the price movements in a security over a period of time.
The candlestick pattern is a visual representation of price action. In candlestick charting, the body represents the range between the open and close of a given time. The lines stretching from the body represent the high and low prices during that period. The line length indicates whether or not there was significant trading activity at that price level during this timeframe.
Each bar color indicates whether the close for the time was higher than, lower than, or equal to the opening. If you see multiple candles with the same closing, it means that there was little or no change between periods and, therefore, no real trend developed during that time frame.
You can use candlesticks for intra-day trading and more extended periods like weeks and months. The candlestick charting system is one of many technical analysis tools investors and traders use to evaluate investment potential.
How to Read the Candlestick Chart
You can identify candlestick patterns by their distinctive shapes or shadows. The candlestick’s body represents a period’s opening and closing prices, while the shape represents the trading range.
Candlesticks are also extremely useful for identifying support and resistance levels, which you can use when making trading decisions. Traders can identify potential areas of support by looking for past instances where prices reversed at a particular price level or resistances by looking for times when prices failed to move above a certain level.
The most common candlestick patterns include;
- The bearish reversal patterns indicate downward pressure on a stock or commodity. A bearish candle is the opposite for the open and close, but the highs and lows remain the same. The open is above the close for a bearish candle.
- The bullish reversal patterns signal upward pressure. The most important thing to note is that the open is at the bottom. Therefore, the price moves higher and finally closes at the top.
- The continuation patterns indicate further advances or declines; and the various candlesticks that stem from these.
When to Use the Candlestick Patterns
Candlestick patterns are the most used method of technical analysis in trading. Candlestick pattern is a form of charting that helps traders make decisions regarding buying and selling stocks, currencies, and commodities. The patterns help show where prices have been, what will happen next, and whether it is good to buy or sell.
When to use candlestick patterns;
- You might want to use candlesticks when you want to get a better perspective of price trends over time. This might be because you are looking at a short time frame, like hours or days. Candles give you the big picture over a long period.
- Candlesticks can come in handy when you want to trade the opening range breakout. Candles can show you whether the price movement will stop or continue after the opening.
- Candles are also helpful when you need to see the current trend while trading intraday or shorter time frames like minutes or hours.
- A final instance when candlesticks will come in handy is when you want to try trading reversal patterns.
Advantages of a candlestick chart
The word candlestick comes from the fact that the top and bottom of the chart are typically shaped like candles.
These charts are used heavily across the financial industry, particularly in technical analysis. Candlesticks have some advantages over other types of charts, including:
Color-coded candles: Each candle has four sections. The top and bottom sections can be green or red. And this is dependent on whether the price moved up or down during the period.
Single-line chart: Rather than displaying numerous lines on a single graph, candlesticks display only one line for each candle. It makes it easier to see important details.
More historical data: Candlesticks display significantly more data than other forms of financial charts. They also show more recent information than most other forms of charting.
Many trading systems have developed over time to predict where the price of a stock will head next. Candlestick patterns are one such system. By understanding how they work, you can glimpse what direction a stock will likely head in soon after opening.