Candlesticks are a popular tool used in technical analysis to study price movements in financial markets such as stocks, currencies, bonds and commodities. They provide visual representations of price data over a specified time period and can be used to identify trends, patterns and potential market reversals.
A candlestick consists of four main components: i) the open, ii) the close, iii) the high, and iv) the low. Each component represents a specific price level during the given time period. The body of the candlestick is formed by the open and close prices while the high and low prices are represented by thin lines called wicks or shadows.
There are several types of candlestick patterns each with its own characteristics and implications for market behavior. There are some commonly encountered candlestick patterns:-
Doji: A doji candlestick has a small body, indicating that the open and close prices are very close or virtually the same. It suggests indecision in the market and potential trend reversals.
Hammer: A hammer candlestick has a small body near the top of the trading range and a long lower wick. It typically appears after a downtrend and signifies a potential reversal to an uptrend.
Shooting Star: A shooting star candlestick has a small body near the bottom of the trading range and a long upper wick. It often occurs after an uptrend and suggests a possible trend reversal to a downtrend.
Engulfing: An engulfing candlestick pattern consists of two candles where the body of the second candle completely engulfs the body of the previous candle. A bullish engulfing pattern occurs at the bottom of a down-trend and implies a potential reversal to an up-trend while a bearish engulfing pattern appears at the top of an uptrend and indicates a possible reversal to a down-trend.
Morning Star: The morning star pattern is a three candle pattern that signals a potential reversal from a downtrend to an uptrend. It consists of a long bearish candle followed by a small-bodied candle (could be bullish or bearish) and finally, a long bullish candle that closes above the midpoint of the first candle.
Evening Star: The evening star pattern is the opposite of the morning star and suggests a potential reversal from an uptrend to a downtrend. It consists of a long bullish candle, followed by a small-bodied candle and then a long bearish candle that closes below the midpoint of the first candle.
Harami: A candlestick with a small body that is completely engulfed by the body of the previous candlestick, which also indicates a potential trend reversal.
Marubozu: A long candlestick with no wicks or shadows which indicates a strong trend.
These are just a few examples of candlestick patterns and there are many more variations and combinations that traders analyze to make informed decisions about market trends and potential price movements.
Therefore, Candlesticks are a type of charting technique used in financial analysis to represent price movements of an asset such as stocks, bonds, currencies and commodities. Candlesticks provide a visual representation of the price action over a certain period of time, typically a day, week, month or year.
