Candlestick chart
A candlestick chart is a style of bar-chart used primarily to describe price movements of an equity over time.
It is a combination of a line-chart and a bar-chart in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity price patterns.
History
Candlestick charts were developed by Japanese rice traders in the 17th century to have an easy overview of open, high, low and close prices over a certain period. This charting style is very popular because of easiness in reading and understanding the charts. Since 17th century, there has been lots of efforts to relate chart patterns to its behavior in the future. This method to chart prices proved to be particularly interesting due to the fact that four datapoints could be displayed instead of one single datapoint, thus containing more information. Those Japanese rice traders also found that the charts resulting from those candlesticks would provide a fairly reliable tool to predict future demand, thus giving them the chance to take advantage of future price fluctuations. Steve Nison's book Japanese Candlestick Charting Techniques called back into traders' memory this particular form of charting that had already been picked up by Charles Dow around 1900. Today it is one of the most commonly used chart displaying methods with traders. Another great book is Profitable Candlestick Trading by Stephen W. Bigalow. Bigalow's book is arguably easier to understand than Nison's. Bigalow also offers an array of other tools such as CD Courses, Flash Cards, Forums, Seminars & more.
Candlestick Layout
Candlesticks are usually composed of the body (black or white), an upper and a lower shadow (wick), however a candlestick does not necessarily need body and/or wick. The trading range in terms of opening, high, low, and closing price determine the shape of the candlestick. A white body signals a higher closing price compared to the opening price, whereas a black body indicates a lower closing price as compared to the opening price.
Patterns
Simple Patterns
There are multiple forms of candlestick chart patterns, those depicted to your right however are the most simple ones. Here is a quick overview of their names:
- White candlestick - signals uptrend movement (those occur in different lengths, the longer the more significant the price change)
- Black candlestick - signals downtrend movement (those occur in different lengths, the longer the more significant the price change)
- Long lower shadow - bullish signal (the lower wick must be at least the body's size, the longer the lower wick, the more reliable the signal)
- Long upper shadow - bearish signal (the upper wick must be at least the body's size, the longer the upper wick, the more reliable the signal)
- Hammer - a bullish pattern during a downtrend (long lower wick & no or only small 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, no or only small body, wick has the multiple length of the body.
- 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)
- Spinning top white - neutral pattern, meaningful in combination with other candlestick patterns
- Spinning top black - neutral pattern, meaningful in combination with other candlestick patterns
- Doji - neutral pattern, meaningful in combination with other candlestick patterns
- Long legged doji - signals a top reversal
- Dragonfly doji - signals trend reversal (no upper wick, long lower wick)
- Gravestone doji - signals trend reversal (no lower wick, long upper wick)
- Marubozu white - dominant bullish trades, continued bullish trend (no upper, no lower wick)
- Marubozu black - dominant bearish trades, continued bearish trend (no upper, no lower wick)
Complex Patterns
Despite those rather simple patterns depicted in the section above, there are more complex and difficult patterns which have been identified over the past. More complex patterns can be found at E-Charts.Com or StockCharts.com
Scientific Explanation
Candlestick is a just visual aid to human psychology. For example, when the bar is white, it means buyers are very bullish and replenish the buying power to the end of the day without fear. Because of this extreme confidence, stock price tends to continue moving higher the day after. The opposite is true for a black bar.