candlestick chart Or Candlestick (Candlestick) It is one of the most important technical analysis charts. This type of chart gives us vital information about the price trend of an asset in a certain period of time in the past. By analyzing the candlestick chart and identifying and recognizing the candlestick patterns in it, traders predict the possibilities of the price trend in the future.
It is interesting to know that candlestick charts were created by Munehisa Homma, a Japanese rice trader, in the 18th century. Japanese rice traders have been using these charts for hundreds of years to track the market price and its daily movement. But What is a candlestick? And how can it be used for price prediction? In the rest of this article, we will answer this question.
What is a candlestick?
Candlestick Or candlestick chart opening price, Closure, the floor And ceiling Represents a digital currency in different time frames (for example, hourly or daily). The reason for naming this chart is its appearance body And Shadow Top And Down It is similar to a candle. Japanese They were the creators of the candle stick and so on Japanese candlestick chart It is also said
Read more: Free webinar on the starting point of technical analysis
Candlestick is one of the most popular charts used in technical analysis, which, of course, is not only used for digital currency analysis, but also for technical analysis of other financial markets. A candlestick chart consists of a large number of candlesticks.
Read more: What is technical analysis and what is its application?
4 parts of important information that a candle gives us are:
- Opening price: The purchase and sale price of an asset at the beginning of a specific time period or trading session (for example, a day).
- Closing price: The purchase and sale price of an asset at the end of a specified time period or trading session (for example, a day).
- Price floor (Low): The lowest price of an asset in a specified time period
- Price ceiling (High): The highest price of an asset in a certain period of time
The structure of a candle in a candlestick chart
A candle in a candlestick chart consists of the following components:
- The wide part of the candle called “body”.
- If the body of the candlestick is red or black, it means that the closing price was lower than the opening price of that asset in that specific period of time (for example, one day); It means downward trend.
- If the body of the candlestick is green or white, it means that the opening price was higher than the closing price of that asset in that specific period of time (for example, one day); It means the upward trend.
- The vertical line above the candlestick shows the price ceiling.
- The bottom vertical line of the candlestick shows the price floor.
In the figure below, you can see the structure of a candle in the candlestick chart:
Comparison of candlestick chart and bar chart
Bar charts and candlestick charts show the same information in a different way. Candlestick charts are easier to understand visually due to the color of the candles and their thicker body. By highlighting prices in this way, it becomes easier for traders to see the difference between the open and close price.
The image above shows the difference in appearance between a bar chart and a candlestick chart.
Shadows on a candlestick chart
On candlestick charts just above and below the body of the candles, often Vertical lines in the name of Shadow (which sometimes to them wick they also say) can be seen. The upper shadow end of the price ceiling And The bottom shadow end of the price floor Is.
The shadows show the high and low prices in the transactions of that day or that period. If upper shadow In a bearish candle Short If it is, it shows that the opening price on that day was close to the ceiling price of that day. If upper shadow In a bullish candle Short If it is, it shows that the closing price on that day was close to the ceiling price of that day.
Therefore, the appearance of candles varies based on the relationship between the open and close prices and the minimum and maximum price in that time period. The body of the candle can be short or long, green or red, and the shadows of the candle can be short or long, each of which shows the difference in prices.
Candlestick chart applications
The main uses of the candlestick chart These are:
- Finding patterns
- Investigating investors' sentiments
- Determining the time of arrival and departure
Traders looking to find patterns can use the candlestick chart. Candlestick reflects the impact of investor sentiment on the price of digital currencies. Technical analysts use candlestick charts to determine when to enter and exit trades. The shape and size of the candles in the candlestick chart is very important.
Read more: What is sentiment analysis and how is it done?
Long white/green candles indicate that there is strong buying pressure and the price is bullish. However, candlesticks should be viewed within the framework of the market structure and not in isolation. For example, if a long white/green candlestick forms at an important support level, it is of high importance.
Conversely, long black/red candles indicate that there is significant selling pressure and the price is bearish. Traders can use candlestick signals to analyze all trading cycles, including daily or hourly cycles or even minute cycles in trading.
Two candlestick patterns
Traders and analysts look for patterns in candlestick charts; Because many short-term trading strategies can be implemented based on candlestick patterns. A double candlestick pattern refers to a candlestick pattern that includes two consecutive candles or candlesticks on a price chart. Patterns like engulfing pattern and Harami pattern are two candlestick patterns.
The covering pattern shows a reversal trend. The first candle has a small body that is completely covered by the second candle. If the covering pattern appears at the end of a downtrend, it is known as a bullish covering pattern and if it appears at the end of an uptrend, it is called a bearish covering pattern.
Harami is also a reversal pattern where the second candle is completely inside the first candle and is opposite in color. We also have the Harami Cross pattern, which we will explain below.
Three candlestick patterns
Three candlestick patterns include three consecutive candlesticks on a price chart. Morning Star and Evening Star patterns are three candlestick patterns. The evening star is a bearish reversal pattern where the first candle continues the uptrend. The second candle has a price gap and a slim body. The third candle closes below the midpoint of the first candle.
The morning star is also a bullish reversal pattern where the first candle is long and black/red. The body of the second candle is short and doji-shaped; Doji means that the opening and closing prices of that candle are close to each other. The third candle is white/green with a long body that closes above the midpoint of the first candle.
Important candlestick patterns in the candlestick chart
Candlesticks are created by the action of buyers and sellers and by the rise and fall of prices. While these price movements sometimes seem random, they often form patterns that traders use for their technical analysis.
Patterns are divided into ascending and descending categories. Ascending patterns indicate the possibility of price increase, while bearish patterns indicate the possibility of price decrease. Note, however, that no pattern can determine future price trends with certainty, as candlestick patterns indicate tendencies and probabilities, not guarantees.
some of The most important patterns that make up the candlestick chart These are:
- Hammer pattern
- The Hanged Man Pattern
- Covering pattern (rising and falling)
- Evening star pattern
- Harami pattern (ascending and descending)
- Harami cross pattern (ascending and descending)
- Triple pattern (ascending and descending)
Hammer pattern
Hammer is a bullish reversal pattern. This pattern is formed when the price drops significantly after the open, but eventually rises and closes close to the price ceiling.
Visually, the hammer pattern looks like a square lollipop, with a small body near the top (indicating the open and close prices) and a long lower shadow (indicating the downward movement of the price over the time frame).
The pattern of the hanged man
The Hanging Man pattern is the bearish counterpart of the Hammer pattern. This pattern is formed when the price opens. Then, during a trading period, the price moves lower, but rises again to close close to the ceiling.
Its structure is similar to a hammer pattern, with a small body at the top (indicating open and close prices) and a long lower shadow. The difference between these two patterns is that the hammer pattern must be preceded by a bearish trend, but the hanging man pattern is created in an uptrend and indicates an upcoming bearish trend.
Bearish covering pattern
A bearish pattern is formed in an uptrend when there are more sellers than buyers. This pattern (Bearish Engulfing) is shown by a long red (black) body that covers a small green (white) body. This pattern indicates that the sellers have taken control of the market and the price is likely to continue to decline.
Bullish covering pattern
When buyers outnumber sellers, a bullish engulfing pattern appears in a downtrend. This pattern is represented on the chart by a long green body covering a small red body. A bullish covering pattern indicates that buyers have taken control of the market and the price is likely to continue to rise.
Descending evening star pattern
The bearish evening star pattern is a topping pattern and three candles, that is, it consists of at least 3 candles. In technical analysis, topping patterns indicate a potential reversal or reversal of an uptrend.
These patterns usually occur after a long period of upward price movement and may mean that market sentiment is changing from bullish to bearish. Topping patterns can be a tool for traders to identify potential opportunities to sell or exit profitable buying positions.
The evening star descending pattern consists of three candles, which are a long green candle, a short green or red candle, and a long red candle, respectively. This pattern indicates the cessation of dominance by buyers and then control of the market by sellers, and selling pressure can increase. The morning star pattern is the opposite of the evening star and can indicate an uptrend.
Descending Harami pattern
A Bearish Harami pattern consists of a small black or red candle that is completely inside a white or green candle from the previous day. It may not be possible to make a definite decision to trade based on this pattern, but it can be important to observe and recognize it.
This pattern shows the lack of decision on the part of buyers. If the price continues higher after that, the market may still be in an uptrend, but if a candlestick forms below the pattern, it indicates a bearish trend.
Bullish Harami pattern
Bullish Harami is the opposite of bearish Harami. This pattern is formed in a downtrend, and a small green or white candlestick is formed inside the large red or black candlestick of the previous day. This pattern tells technical traders that the trend is stalling and if another bullish day follows, more bullish trends may be on the way.
Descending Harami Cross Pattern
A Bearish Harami Cross pattern occurs in an uptrend and is similar to a bearish Harami Cross pattern, but the difference is that the first candle is followed by a doji. As we said, a doji is a candle where the opening and closing prices are very close together.
A doji usually appears on candlestick charts as a positive sign or a cross. Here the doji is placed exactly at the length of its previous candlestick. The concept of the bearish harami cross pattern is the same as the bearish harami pattern.
Ascending Harami Cross Pattern
The Bullish Harami Cross pattern is the opposite of the previous pattern and occurs in a downward trend; Where a down candle is followed by a doji. This doji is placed in the body of the previous candle. The concept of the bullish harami cross pattern is the same as the bullish harami pattern.
Ascending triple pattern
The bullish rising three pattern starts with a long green or white candlestick. Then in the 2nd, 3rd and 4th trading sessions, we see small candles that push the price lower, but still remain in the long white/green day price range. The fifth and final day in this pattern forms another long green candlestick.
Although this pattern shows us that the price has been declining for three consecutive days or three specific time periods, it does not form a new price floor, which means that sellers are preparing for the next up move.
A modified form of this pattern is when the second day's candle goes slightly higher than the first day's long candle. The rest of the pattern is similar to the Ascending Triad and looks just a little different. When this pattern occurs, it is called a Bullish Mat Hold pattern.
Descending triple pattern
The bearish rising three pattern begins with a strong bearish day, i.e. a long red or black candle. It is followed by three small candles that advance higher, but these three candles remain within the range of the long candle of the first day or the first trading session.
The pattern is completed when the fifth day makes another big bearish move and another long red candle is formed. This indicates that the sellers have regained control of the market and the price can decline.
Frequently asked questions
At its simplest, when you look at a candlestick, the first thing you see is the body and two shadows, which represent the open price, the close price, the high price, and the low price. For more advanced analysis of candles, you need to learn their patterns and how to read them.
None of the candlestick chart patterns can be considered the most accurate. Some of them are more famous than others, the hammer pattern or the hanging man are two examples of them; But these patterns are not certain, but rather indicate possibilities.
The first thing to consider when reading a candlestick chart pattern is whether it is bullish, bearish, or neutral. Also, never try to make a pattern when there is none.
Conclusion
In this article, we learned about the concept, appearance and structure of candlestick charts or candlestick charts. A candlestick chart consists of candles or candlesticks, each of which represents a specific trading period. Each candle gives us important information about the opening price, the closing price, and the price ceiling and floor, just by its appearance.
Candles can be green/white or red/black. A green or white candle means that the trend of that trading period was upward and the closing price was higher than the opening price. A red or black candle means that the trend of that trading period was downward and the closing price was lower than the opening price.
The candlestick chart is one of the most important tools in technical analysis, because analysts and traders try to identify important patterns by carefully observing these charts. There are many types of patterns in the candlestick chart, some of which we introduced in the article. By identifying and recognizing these patterns, technical analysts can strengthen the possibility of the future upward or downward trend.
Of course, it is suggested to use other technical analysis tools such as indicators and oscillators in addition to charts and candlestick patterns to increase the probability of correctness of your analysis.
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