Candelsticks

 

1. Candles

   1. Body: The rectangular section of a candle representing the range between the opening and closing prices. A long body suggests strong buying or selling pressure, while a short body indicates indecision. (ask about this last part, and I will explain)

   2. Wick: Lines extending from the body that show the highest and lowest prices reached during the period.

   3. Colors: Typically green or white for a bullish (upward) candle, and red or black for a bearish (downward) candle.

      1. Green: For a bullish (upward) candle.

      2. Red: For a bearish (downward) candle.

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FURTHER EXPLANATIONS:
 

Long green body: Strong buying pressure. The price advanced significantly from open to close.

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Long red body: Strong selling pressure. The price declined significantly from open to close.

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Short body: Indecision between buyers and sellers. Prices ended up close to where they opened.

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Long upper wick: Buyers drove the price up, but sellers pushed it back down before the close. This indicates selling pressure.

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Long lower wick: Sellers drove the price down, but buyers pushed it back up before the close. This indicates buying pressure.

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Doji: A candle with a very small or nonexistent body, where the open and close prices are nearly identical. It represents market indecision or a standoff between buyers and sellers.

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Marubozu: A candle with no wick, indicating that the open and close were also the session's high and low, respectively. A green Marubozu indicates buyers were in control all day, while a red one indicates sellers were in control.

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Reading Gaps: Gapping is another signal that traders will look for with candlestick charts. Candles that gap above or below the previous candle are an indication that there is momentum in the trend.

 

Thoughts on Candlesticks

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Wide range candles:
If we know that stocks tend to move in the direction of wide range candles, we can look to the left of any chart to gauge the interest of either the buyers or sellers and trade in the direction of the trend and the candles.

The importance of this cannot be overstated! You want to know if there is interest in the stock and if it is being accumulated or distributed by institutional traders.

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Narrow range candles:

Narrow range candles imply low volatility. This is a period of time when there is very little interest in the stock. Looking at the chart above, you can see that these narrow range candles often lead to reversals (up or down).

Low volatility leads to high volatility, and high volatility leads to low volatility. So, knowing this, doesn’t it make sense to enter a stock in periods of low volatility and exit a stock in periods of high volatility? Yes.
 

Before just memorizing candlestick patterns like hammers, doji’s, and shooting stars, you must understand how a candle represents the struggle between buyers and sellers.

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Consider this…​

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Hammer candlestick pattern:

In the picture above, we see a classic candlestick pattern called a hammer. What happened to cause this? The stock opened, then at some point, the sellers took control of the stock and pushed it lower. Many traders were shorting this stock, thinking it was headed lower.

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But by the end of the day, the buyers took control, forced those short sellers to cover their positions, and the stock had enough strength to close the stock at the top of the range. So, this is obviously very bullish!

When we are reading candlestick charts, memorizing candlestick patterns will only get you so far. What we do need to know is why the candle looks the way that it does, and how that affects price movement.