Candlestick is a form of a chart that is mostly used by traders to do various calculations in patterns of the securities through technical analysis. It contains all the elements of ohlc(open high low close) prices of the security of the commodity over a period of time.
Candlesticks were first introduced by Japanesse rice trader named Homma in the early 1700s, as he tried to understand the fact that even though there was a relation of the price with the supply and demand of rice, the emotions of traders also had a great effect on the price. He was able to show these emotions of traders using these candlesticks of different colours representing the upwards or downwards motion of the price of rice. With the efflux of time, the various patterns became more and more apparent and the traders were able to make the right decisions at the right time by studying these patterns, which marked the beginning of successful short term prediction of values of securities and commodities.
Candlesticks are based on two colours, mostly red and green. The red colour of the candlestick indicates that the opening price of the security is higher than the closing price of the security in a given period of time, i.e., the price has gone down. Green candlestick on the other hand indicates that the price has gone up.
Components of a Candlestick
A candlestick represents the open, high, low and close prices over a period of time. The real body represents the difference between the opening and the closing price of the securities and the wicks on both ends represents the high and low prices. The upper wick refers to the high price while the lower one represents the closing price. In a green candlestick, the upper end of the body is the closing price and the lower end represents the opening price. On the other hand, in a red candle, the upper end shows the opening price and the lower end shows the closing price.
Since the green candlestick represents an increase in the price of the security, it is also known as the bullish candlestick and since the red one represents a fall in the price, it is called the bearish candlestick.
While looking at the historical prices of various securities through candlestick charts, various patterns can be observed which are recurring in nature and seem to be always leading to a predictable outcome. There are various forms of patterns which could be categorized into two main heads, one candlestick patterns and multiple candlestick patterns. In this article, we’ll take a look at some of the single candlestick patterns.
Single Candlestick Patterns
1. Bullish Marubozu
This is a green candlestick with no wicks, i.e., the high price is equal to the closing price and the low price is equal to the opening price. This type of candlestick indicates a possible increase in the price of the commodity.
2. Bearish Marubozu
This is similar to the bullish marubozu with the key difference being the colour red instead of green. This means that the low price is equal to the closing price and the high price is equal to the opening price. This type of candlestick indicates a downwards trend in the possible future prices of the security.
3. Spinning top
A spinning top is a kind of candlestick in which the opening and closing prices are very near to each other and high and close prices vary differently making a candlestick with a small body but very long vicks. These kinds of candlesticks indicate indecisiveness in the mind of investors and we should wait for the market to respond further to make the decision of investment
A doji candlestick is formed when there is a high difference between the high and low prices of the security but the opening and closing prices are so close to each other that they are virtually equal. Just like the spinning top, they reflect indecisiveness in the minds of investors and the best thing to do for now is to wait before making any decision on whether to invest or disinvest or not.