What Is A Candlestick?
A candlestick chart displays an asset’s high, low, open, and closing prices for a specific time frame. Japanese rice traders first used it to monitor market prices and momentum before it gained popularity in the United States. The chart’s “real body” shows whether the closing price was higher or lower than the opening price, using color coding (black/red for a lower close, white/green for a higher one).
The “shadows” on the candlestick represent the day’s high and low prices relative to the opening and closing prices. The shape of the candlestick changes based on these four key price points.
Candlestick charts help technical analysts decide when to buy or sell. Originating in 1700s Japan for rice price tracking, these charts are useful for trading a variety of liquid financial assets like stocks, forex, and futures.
Long white/green candlesticks signal strong buying pressure, typically indicating a bullish price movement. Their significance increases if they appear at key support levels. On the other hand, long black/red candlesticks reveal significant selling pressure, suggesting bearish price action. A “hammer” is a bullish reversal pattern that appears when the price drops significantly post-opening but rallies to close near the high. Its bearish counterpart is known as a “hanging man.”
Two-Day Candlestick Trading Patterns
Various short-term trading strategies rely on patterns. One such pattern is the engulfing pattern, signaling a likely trend reversal. In this pattern, the second candlestick fully engulfs the first one. It’s known as a bullish engulfing pattern at a downtrend’s end and a bearish one at an uptrend’s conclusion. The harami is another reversal pattern, where the second candlestick fits entirely within the first and has a different color. A variation is the “harami cross,” characterized by a second one that is a doji, where opening and closing prices are nearly the same.
Three-Day Candlestick Trading Patterns
The “evening star” is a bearish reversal pattern featuring a continuing uptrend in the first candlestick. The second one gaps up and has a narrow body. The third one closes below the midpoint of the first. Conversely, a “morning star” is a bullish reversal pattern. The first candlestick is long and black/red, followed by a short one that gaps lower. The pattern concludes with a long white/green one closing above the first one’s midpoint.