The Candlestick chart is used in stocks, equity, foreign exchange and commodities trading to keep track of the price movement. You can use it in all time frames—whether you are a long term investor or indulge in day trading, this chart can be equally useful.
Anatomy of a Candlestick Chart
The Candlestick chart is plotted with a data set that contains Open, Close, High and Low values for each time period you want to plot. The hollow/solid portion is called the Body. The lines above and below the Body are called Upper and Lower Shadow respectively. The Highest Trading Price is marked by the top of the Upper Shadow and the Lowest trading Price is marked by the bottom of the Lower Shadow. During selling pressure(Bearish tendencies), the Opening Price is more than the Closing Price and you get a solid body. Conversely, during buying pressure (Bullish tendencies), the Closing Price is more than the Opening Price and you get a hollow body.
How to interpret Candlestick charts ?
The chart below plots the stock price movement of GE for 1 month.
As we saw earlier, each Candlestick shows the opening price, closing price, highest trading price and lowest trading price of the stock on that particular day. Based on these 4 prices, Candlesticks can form various patterns like Engulfing, Hammer, Shooting Star, Doji and many more. We discuss some of these patterns in the next section.
Candlestick Chart Patterns
Bullish Engulfing pattern is formed when a small solid Candlestick is followed by a large hollow Candlestick which completely 'engulfs' the smaller Candlestick. It indicates that the buyers have taken control of a stock's price movement from the sellers.
Bearish Engulfing pattern is formed when a small hollow Candlestick is followed by a large solid Candlestick which completely ‘engulfs’ the smaller Candlestick. It indicates that the sellers have taken control of a stock’s price movement from the buyers.
Hammer candlestick is formed when a stock moves significantly lower than the opening price but rallies in the day to close above or near the opening price.
Shooting Star (Bullish)
Shooting Star candlestick is formed when a stock moves significantly higher than the opening price but rallies in the day to close below or near the opening price. It is an inverted Hammer.
Doji candlesticks form when a stock's open and close are almost equal. The length of the upper and lower shadows can vary, and the resulting candlestick looks like a cross, an inverted cross, or a plus sign. A Doji indicates a sense of indecision between buyers and sellers.
We have covered the basic Candlestick patterns in this article. Click here to know about other patterns.