Structure and Patterns of Candlestick
Candlestick is a type of chart used to show price movements in the stock market, forex, commodity, or other financial markets. It is an important part of technical analysis and helps investors or traders predict market trends and future price changes. Candlestick charts originated in Japan in the 17th century, and were developed by rice merchant Munehisa Homma.
Structure of Candlestick
A candlestick shows four main price points, which occur for a given time period (e.g. 1 minute, 5 minutes, 1 day, weekly, monthly, etc.):
Open Price: The price at which the first trade took place in that time period, Close Price: The price at which the last trade took place in that time period, High Price: The highest price in that time period. Low Price: The lowest price in that time period.
Parts of a Candlestick
Body: This is the thick part of the candle, which shows the difference between the open and close price. If the close price is higher than the open, the body is usually green or white (bullish candle - price rose). If the close price is lower than the open, the body is red or black (bearish candle - price fell).
Wicks/Shadows: The thin lines above and below the body, which represent the high and low prices. These are called the "upper shadow" and "lower shadow".
How does a candlestick work?
A candlestick chart shows the market price over time, and it helps investors or traders understand the market mood and potential trends. It works in the following ways:
Pattern Recognition: Candlestick patterns (such as doji, hammer, engulfing, morning star, etc.) indicate market reversal or continuation.
Example
: Hammer (long shadow below, short body) indicates a reversal after a downward trend, which may mean the price will now rise.
Doji (short body, long shadow) shows indecision, which may be a sign of a trend change.
Analysis based on time period : Traders look at candles of different time periods (1 minute, 5 minutes, 1 day, weekly, monthly etc.) according to their strategy. Short period (such as 1 minute) for day trading. Long period (such as 1 day) for long term investment.
Understanding market sentiment : The body and shadow of the candle indicate whether the pressure of buyers or sellers is high. Long green body means dominance of buyers, possibility of price rise. Long red body means dominance of sellers, possibility of price fall.
Support and resistance levels: Candles help in identifying support and resistance levels. If the price repeatedly bounces off a level, it may be support/resistance.
Example
Suppose a stock has a 1-day candle: Open: Rs 100, Close: Rs 110, High: Rs 112, Low: Rs 98 This would be a green candle as the close is above the open, with a body from 100 to 110, upper shadow from 110 to 112, and lower shadow from 100 to 98. This shows that buyers built up pressure at the end of the day and the price rose.
Candles only provide price information, not incorporating other market factors (such as news, economic events). There is also a possibility of misinterpretation, especially for new investors or traders. May give misleading signals in a short time period.
In summary, candlestick charts are a powerful tool that helps investors or traders understand market trends and price behavior, but they are most effective when used in conjunction with other indicators and strategies.
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