Candlestick charts
Candlestick charts are the first known style of technical analysis. When you look at this chart, it is made up of many red and green bars called candlesticks. They are called candlesticks because they resemble a candlestick with a wick coming out the top and bottom.
Technical analysis
The green candlesticks represent a period of time when the stock increased in value. The red candlesticks represent a period of time when the stock decreased in value. The time period that each candle represents can be anything from a minute to an hour, to a day or even a month. If we build a chart representing a day, we could specify that each candlestick represents one minute or five minutes. If we were trying to build a candlestick chart for a year, we might specify that each candlestick represents a day or a week. Candlestick charts are really easy to understand. We need to start with the open price of a stock, the closing price of a stock, the highest price the stock hits during the day and the lowest price the stock hits. All these pieces are illustrated in a candlestick.
Let’s start with a candlestick that represents a stock increasing in price over a period of time. The body of these candlesticks is green. The opening price of the stock is the top of the body. The closing price of the stock is the bottom of the body. The body of the candlestick is green to represent the stock increasing in price for the day. The highest price for the day is the highest point on the upper wick. The upper wick is called the upper shadow. The lowest price for the day is represented by the lowest point on the lower wick. The lower wick is called the lower shadow. This illustration quickly shows the action of price throughout the day. In another class, we will discuss how a single candlestick along with volume will give any investor valuable information about the future direction of the market. Now let’s look at a candlestick that represents the stock value going down for the day. As you might guess, this candlestick is red to identify the loss. At a red candle, the opening price is seen as the bottom of the candle body. The closing price is the top of the candle body. The bottom of the lower wick is the lowest price the stock reaches during the day. As you would guess, this lower wick is called the lower shadow. The top of the upper wick represents the highest price the stock reaches and just like with the green candle, the upper wick is called the upper shadow. Sometimes you will see green candlesticks represented by hollow and black-filled candlesticks. In these cases, the hollow candlesticks represent that the closing price is higher than the open price. The black-filled candlesticks represent the price dropping that day like a red candle.
Candlestick charts part two
Long and short bodies
The longer the body of a candlestick, the more pressure for the stock to increase or decrease in price compared to the opening price. A short-bodied candlestick represents a consolidation of price where buyers and sellers were more in agreement on what the price of the stock should be. Long hollow or green candlesticks show strong buying pressure. The longer the body, the further the close was from the open and the more the price rose from the opening price. Often this represents strong bullish pressure, but this also depends on the volume and pattern created by the previous candlesticks. If this long green or clear candlestick occurs at the bottom of a longer period of price decline, it may show that the bulls have dug in and set a price that they think is too low. If they defend this price and continue to buy at this price, forcing the stock up in value, it is called a resistance price. Long black or red candlesticks show strong selling pressure. If the long-body candle was red or completely black, it could show panic where those who had been holding on to the stock admitted that the stock was going to fall or it could show that an institution was ready to dump a large block of its holdings to take profits.
Long vs short shadows
The Upper and Lower Wicks or Shadows can show very valuable information about a trading session. Upper Shadows represent the highest price of the day and Lower Shadow represents the lowest price of the day. Days with short shadows indicate that most of the trading took place near open and close prices. Candlesticks with long shadows show that buyers and/or sellers fought losing battles to get the price higher or lower. When the top shadow is long, it shows that the buyers (also called the bulls) fought to take the price higher and lost when the sellers (or bears) pulled the price back down. The bottom shadow represents the sellers pushing the price down and the buyers helping to pull it back up.
Candlestick pattern Class three
Candlesticks have several standard shapes, each of which has its own meaning for a trader. Marubosu – Candlesticks with a long body and very short or no wicks are called Marubosu. This is a candlestick that shows there was tremendous pressure to buy (green Marubosu) or sell (red Marubosu) for that trading period. The candlestick has much more meaning for traders and technical analysts when put in context with a complete chart and volume information. For example, when a red Marubosu occurs at a point of resistance (at a stock price that the stock has previously been unable to break through) would be a strong signal for a reversal. When it occurs near support (a price that the stock has previously been unable to fall below), it is also a bearish signal that the stock will continue in a bearish trend. If combined with a spike in volume, it is an even more compelling sign. Spinning Tops – Candlesticks with a long upper shadow, long lower shadow and small real body are called spinning. A long shadow represents a kind of reversal; the spinning tops represent indecision. The small real body (whether hollow or filled) shows little movement from open to closed, and the shadows indicate that both bulls and bears were active during the session. Although the session opened and closed with little change, prices moved significantly higher and lower during the time. Neither buyers nor sellers were able to gain the upper hand and the result was a halt. After a long advance or a long white candlestick indicates a spinning weakness among the bulls and a potential change or break in the trend. After a long decline or a long black candlestick, a spin indicates weakness among the bears and a potential change or break in the trend. Long Upper or Lower Shadow – Long upper shadows warn that there may not be enough demand at higher prices to continue pushing the stock upward, at least in the short term. Although the stock or index may have formed a higher high, it has closed well off that high. This is particularly evident near an area of overhead resistance and/or when a stock or market is overbought. These tails suggest that bullish traders are taking profits on long positions and bearish traders may be initiating short positions. Long lower shadows warn that lower prices are being rejected. Although the stock or index may have formed a lower bottom, it closed well at that low level. This can occur near a support area on the chart and/or when a stock or market is oversold. These tails suggest that bearish traders are taking profits on short positions (covering) and bullish traders are entering long positions. It is important to understand how a long shadow is formed. For example, before a long lower shadow is apparent, it is first a long bearish candle. The bears are clearly in control. Then the bulls begin to initiate long positions, and some short covering occurs, which puts upward pressure on price. As the price starts to rise, a lower shadow starts to appear.
Buying of bulls, and covering of short positions by bears, causes price to move higher and higher, revealing more of the lower shadow. By the end of the session, what was previously a long bearish candle is now a long lower shadow. The strong rally that occurred after the bottom of the session will cause concern for many bearish traders. Eager bulls have arrived and put a damper on the downside. More bulls may jump on board in the following trading sessions and generate a rally and, subsequently, more short covering by bears to add fuel to the rally. Doji – The Doji is a powerful candlestick formation, signifying indecision between bulls and bears. A Doji is quite often found at the bottom and top of trends and is therefore considered a sign of possible reversal of price direction, but the Doji can also be seen as a continuation pattern. A Doji is formed when the opening price and the closing price are equal. A long-legged Doji, often called the “Rickshaw Man” is the same as a Doji, except that the upper and lower shadows are much longer than the regular Doji formation. The creation of the Doji pattern illustrates why the Doji represents such indecision. After the opening, bulls push prices higher only for prices to be rejected and pushed down by the bears. In contrast, bears cannot keep prices lower and bulls then push prices back to the opening price. Of course, a Doji can be formed by prices moving lower first and then higher second, but either way, the market closes back where the day began.
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