Candlestick charts and it's patterns are very popular among currency traders because they are much more visually appealing than a simple line or bar chart. Being able to identify a potential pattern formation, and understanding what candlestick signals are revealing, creates a format for establishing trading positions at the most opportune times.
They can help currency traders to identify potential reversal of trends or possible points to enter or exit the market with a higher degree of reliability.
What follows are the basics of candlesticks and it's patterns.
History
In the 1600s, the Japanese rice trader, Munehisa Honma developed a method of technical analysis to analyze and predict the future price of rice contracts. This technique is called Candlestick Charting that first appeared after 1850. Candlestick charts are simply a new way of looking at price; they don't involve any calculations.
How do they look like?
There are 4 components needed to construct a candlestick, the OPEN, CLOSE, HIGH and LOW price for a given period. Looking to the below examples, the HIGH is marked by the TOP of the upper shadow, the LOW is marked by the BOTTOM of the lower shadow representing the high/low price extremes for the period.
The BODY of the candlestick is called the real body, and represents the range between the open and closing prices. If the CLOSE price is LOWER than the OPEN price, the BODY will be BLACK, if the CLOSE Price is HIGHER than the OPEN price, the BODY will be filled-in.
The white candlestick is called BULLISH (Close price > Open price indicates Buying Pressure), the black candlestick is called BEARISH (Close price<Open Price indicates Selling Pressure)
Candlestick chart example
Difference between Short & Long Bodies
Short Bodies show small price movement or consolidation. Long Bodies show strong buying/selling pressure, the longer the white/black candlestick is, the further the close price is above/below the open price.
Black & White Marubozu candlesticks indicate very strong selling / buying pressure, they do not have lower / upper shadows (wicks). Black Marubozu Candlesticks are formed when the CLOSE price is represented by the LOW. White Marubozu Candlesticks are formed when the CLOSE price is represented by the HIGH.
Hammer and Hanging Man
The Hammer is a bullish pattern during a downtrend, the Hanging man is a bearish pattern during an uptrend (long lower wick, small or no body; wick has the multiple length of the body.
Simple Candlestick Patterns
| 1.White candlestick - bullish signal |
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| 2. Black candlestick - bearish signal |
| 3. Long lower shadow - bullish signal (buyers dominate the session end and bid prices higher) |
| 4. Long upper shadow - bearish signal (sellers dominate the session end and bid prices lower) |
| 5. Hammer - a bullish pattern during a downtrend (long lower wick and small or no body); Shaven head - a bullish pattern during a downtrend & a bearish pattern during an uptrend (no upper wick); Hanging man - bearish pattern during an uptrend (long lower wick, small or no body; wick has the multiple length of the body. |
| 6. Inverted hammer - signals bottom reversal, however confirmation must be obtained from next trade (may be either a white or black body); Shaven bottom - signaling bottom reversal, however confirmation must be obtained from next trade (no lower wick); Shooting star - a bearish pattern during an uptrend (small body, long upper wick, small or no lower wick) |
| 7. Spinning top white - neutral candlestick pattern, needs combination with other patterns |
| 8. Spinning top black - neutral candlestick pattern, needs combination with other patterns |
| 9. Doji - neutral candlestick pattern, needs combination with other patterns |
| 10. Long legged doji - have long upper and lower wicks that are almost equal in length, reflect indecision in the market. |
| 11. Dragonfly doji - can indicate a bearish or bullish trend reversal ,depends on previous price action and future confirmation (no upper shadow, long lower shadow) |
| 12. Gravestone doji - can indicate a bearish or bullish trend reversal, depends on previous price action and future confirmation (no lower shadow, long upper shadow) |
| 13. Marubozu white - indicates very strong buying pressure, bullish trend |
| 14. Marubozu black - indicates very strong selling pressure, bearish trend |
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