What is a candlestick?
A candlestick is a type of price chart used that displays the high, low, open and closing prices of a security for a specific period. He hails from Japanese rice merchants and traders to keep up with market prices and daily momentum for hundreds of years before being popularized in the United States. The wide part of the candlestick is called the “real body” and indicates to investors whether the closing price was higher or lower than the opening price (black / red if the security closed lower, white / green if the security closed rising).
The basics of a candlestick
The shadows of the candlestick show the ups and downs of the day and how they compare to opening and closing. The shape of a candlestick varies depending on the relationship between the high, low, opening and closing prices of the day.
Candlesticks reflect the impact of investor sentiment on security prices and are used by technical analysts to determine when to enter and exit trades. The candlestick mapping is based on a technique developed in Japan in the 1700s to track the price of rice. Candlesticks are an appropriate technique for trading any liquid financial asset such as stocks, currencies and futures.
Long white / green candlesticks indicate strong buying pressure; this generally indicates that the price is bullish. However, they must be viewed in the context of market structure rather than individually. For example, a long white candle is likely to be more important if it forms at a major price support level. Long black / red candlesticks indicate significant selling pressure. This suggests that the price is bearish. A common bullish candlestick reversal pattern, called a hammer, forms when the price moves significantly lower after opening, then rallies to close near the highest. The equivalent bearish candlestick is known as a hanging man. These candlesticks have a similar appearance to a square lollipop and are often used by traders who are trying to choose a top or a bottom in a market.
Traders can use candlestick signals to analyze all trading periods, including daily or hourly cycles, even for one-minute cycles of the trading day.
Two-day candlestick trading models
There are many short-term trading strategies based on candlestick patterns. The engulfing model suggests a potential trend reversal; the first candlestick has a small body which is completely engulfed by the second candlestick. It is called a engulfing bullish model when it appears at the end of a bearish trend and a engulfing bearish model at the end of a bullish trend. The harami is a reversal pattern where the second candlestick is completely contained in the first candlestick and is of opposite color. A related model, the harami cross has a second candlestick which is a doji; when the opening and closing are effectively equal.
Three-day candlestick negotiation models
An evening star is a pattern of bearish reversal where the first candlestick continues the uptrend. The second candlestick empties and has a narrow body. The third candlestick closes below the middle of the first candlestick. A morning star is a bullish reversal pattern where the first candlestick is long and black / red body, followed by a short candlestick which is lower; it is completed by a long-body white / green candlestick which closes above the middle of the first candlestick.
Key points to remember
- Candlestick charts show the high, low, open and closing prices of a security for a specific period.
- The candlesticks came from Japanese rice merchants and traders to follow market prices and daily momentum for hundreds of years before being popularized in the United States.
- Candlesticks can be used by traders looking for patterns of charts.