Candlestick Chart Patterns

The candlestick chart was developed more than two centuries ago by a Japanese rice trader, Munehisa Homma. They are financial charts that are used to display information about an asset’s price movement. Traders have used these candlestick charts for years, and today we still use them in different financial markets. These markets include stocks, forex, commodities, indices and many other things. The price at which each asset is traded is specified and displayed by a candlestick chart. Each candlestick on the chart represents four different information: opening and closing prices, the highest and lowest prices. These charts are one of the best methods of indicating prices.

Knowing how to analyze the candlestick charts is really necessary for traders. The candlesticks charts plot the prices of different assets. You can analyze the chart by each candle individually or by the pattern of several candles. Traders usually begin a long position by seeing a bullish candlestick pattern. On the contrary, they initiate a short position when they spot a bearish candlestick pattern on a chart. We show you different patterns and their bullish or bearish status and the candlestick details in the following.

Candlestick shape details

Each candlestick has a body and two wicks. The body shape of a candlestick is like a rectangle, and it indicates the opening and closing time frame. The bottom of this rectangle represents the opening price for bullish candles, and the top represents the closing price. For a bearish candle, everything is vice versa. The body of candles is usually green or red. This can help traders to receive information about the market situation quickly. If it is green, the buyers control the market, and it shows the market’s bullish sentiment because the closing price is above the opening price. If it is red, the sellers dominate the market, and it shows the market’s bearish sentiment because the closing price is below the opening price.

There are two vertical lines above and below the candle body, and they are known as wicks. These lines indicate the highest and lowest prices in a specific period. The range of each candlestick equals the length of the highest point to the lowest point.

The process of moving an asset price continuously in the same direction is known as a trend. We see an uptrend when the prices keep going up, and on the contrary, the downtrend happens when the prices keep moving down. Identifying the trends is very useful for traders because they can use them to spot the best entry and exit points in a market. Candlesticks and their patterns help you spot the trend changes. There are several famous patterns that show you the high possibility of a trend change in a specific direction. Here you can see the most important bullish and bearish patterns.

How to use a candlestick chart

The constant interaction between buyers and sellers over time creates the candlestick charts. Traders and investors always have an eye on candlestick charts before taking a decision about their closing or opening a position.

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The total length of a candlestick with its wicks represents the volatility in a market. The small body and long wicks show us that a market is volatile. Long wicks and a small body are an indication of price rejections on some levels. When there is no specific trend in a market, we usually see such candles.

Investors who look for opportunities in long time frames usually find these charts very useful. Long-term traders usually rely on fundamental analysis first to decide about a position. Then to find the best entry point, they use candlestick charts. For traders who trade based on short-time periods, correct timing has a high priority. Therefore, candlestick charts are vital for short-term traders in both decision making and timing.

Pros and Cons of a candlestick chart

• Candlestick patterns are very customizable.
• They provide a lot of necessary information.
• These charts are not complicated, and you learn everything about them easily and find the important information at a glance.
• Candlestick charts are a very good friend of most indicators, and you can use them together.
• The charts show you the sentiment of the market, and you can see who controls the market.
• Due to providing a high amount of information, these charts may confuse some people who like simple methods.
• Since these charts simplify understanding price data, many traders may fall into a big trap and believe that using them alone is sufficient for trading.
• They are very addictive due to their attractive nature and features, and you may waste your time looking at them for hours to find a possible opportunity.
• Candlestick charts have some gaps. The closing level of one candle might be at any specific level, and the next candle may open at an entirely different level.

Conclusion

Candlestick charts have drawn the attention of many traders these days. However, you should know that although they may seem very attractive at first, they have their downsides. The signals they show you may not be accurate all the time. The accuracy rate of the patterns on these charts are about 50%. Therefore, since they perfectly work with most indicators, you should not use them alone as your primary technical analysis tool. They provide you with a great insight into the market situation. To maximize your chances to make more profit, try to memorize all of the above patterns.