Candlesticks : Importance In Stock Market
BY: Venteskraft Team
April 11, 2020
A candlestick is a type of chart that shows the high, low, open and close price of a certain security over a certain period of time. It originated from Japanese rice merchants and traders to track market prices and daily momentum hundreds of years before becoming popularized in the United States; therefore it is also referred to as Japanese Candlesticks. The wide part of the candlestick is called the “real body” and tells investors whether the closing price was higher or lower than the opening price. And the high and low price are marked by the wick or the shadow of a candle.
There are two sets of colors in which candlestick charts are used. Red and green and Black and white. Red and black being the bearish candles, stating that the closing price of the stock was lower than the opening price. And Green and white stating that the candles were bullish, and the closing price of the stock was higher than the opening price.
But that is not the end of the story. When certain types of candlestick occur in specific patterns they can tell a lot of information about the upcoming movement of the stock as well as psychological decisions which people would be taking in order to move ahead in the trade. And most of the candlestick patterns are taken as a potential sign of reversal. Although there are hundreds of candlestick patterns, some being rare to find, but there are some candlestick patterns that are easy to spot on the chart and play a crucial role in the stock market.
There are some candlestick patterns which are often seen while trading.
1. Doji Candlesticks: These are the special type of candlesticks which form when the opening price and the closing price of the stock are exactly the same. Whenever a doji happens it is mostly indicating that both the buyers and the sellers are somewhat not decided to push the trend in a specific direction. But the story changes if there are been a previous uptrend or a downtrend, meaning that the reversal is not far.
2. Hammer Candlesticks: Hammer candles indicates about the trend reversal just like most of the candlestick patterns but there
is a very strong characteristic about the hammer candle. When the high of a stock at a particular period is close to the open or sometimes even equal to the opening price, in that case the upper shadow of the candle is negligible. That shows the rising interest of the sellers and resisting buyers. Just opposite to hammer candle is a candle know as shooting star, where the low of the stock at a particular period of time is near or sometimes equal to the opening price, forming a negligible lower shadow. That indicates the increasing interest of the buyers and sellers resisting the trades.
3. Engulfing: After a continuous uptrend when a red(bearish)candle forms completely engulfing the previous green(bullish) candle. That is a sure trend reversal warning. Similarly when there has been a continuous downtrend and then a big green candle forms which completely engulfs the previous red candle, that too means that now buyers will take over the market and an uptrend can be expected.
4. Tweezer Candlesticks: These patterns are difficult to find but are sure signals of trend reversal. When a previous downtrend occurs and then two consecutive candles form with the same low and the first one being a red candle and the second one being a green candle, that informs the trend is going to reverse. Similarly the same thing happens when the trend changes from uptrend to downtrend but this time the highs must be the same.
These were some of the easily found candlestick patterns but apart from this, the length of the wicks and the bodies tell a lot about the stocks movement and behavior.
