Japanese Candlestick patterns are widely used all over the world to analyze charts in any markets like Equity, Forex (currency), Commodities and even in cryptocurrency because of its flexibility in understanding charts.
If you know how to read candlesticks effectively then it will be useful for your trading or investing. Implementing candlestick pattern and techniques on charts many people changed the trading approach. Because they have lot more information than any other charts like Line and bar charts.
Just learning about candlesticks may not make you profitable you have to understand the psychology of people in a candle who are trading in it. Do you agree that stock market is a psychological game of many human brains. Yes it is because price move depending on the sentiment of people. If they are Bullish (positive) about it then price moves up if they are Bearish(negative) than price move down.
If you simple see a line chart it is difficult to understand the sentiment of the stock . Once you apply Candlestick chart it will give you the sentiment of the people.
After applying Candlesticks on chart if you put 5 minutes Candle it defines the behavior of people with in the limit of 5 minutes if we take the candle of 1 day it tells you the what people are thinking about the stock in that particular day.
Understanding Candlestick Pattern formation
To make you understand how a candlestick form I have taken different situations.
At the beginning of the day ABC stock is started at 100 and people are positive about the stock and started to buy it so it moved continuously and at the end of the day it closed at 105. Here we call
- 100 – Open Price and also the Low price of the day and
- 105 – Close Price and also the High price of the day in this condition the candle form like below
Here we are taking a different stock called DEF. In this condition also the stock price started in the beginning of the day at 100 and went to 105 but later on it started to come down little and at the end of the day it closed at 103.
- 100 – Open Price and Low of the day
- 105 – High
- 103 – Closing price
Now we are taking GHI company stock. Here also the stock price is started at 100 and but it declined to 98 and later started to move up and went to 105 and again started to come down little and at the end of the day it closed at 103. Here we call.
- 100 – Open price
- 98 – Low
- 105 – High
- 103 – Closing price
We can say above candle as Bullish candle because the price moved in positive side or upper side
What is Candlestick Body
In the above image if you observe clearly in the beginning the price started at 100 and bears came and pulled the price to 98.
When the price come to 98 bulls taken the Upper hand moved the price to 105 again the bears taken the upper bulls and started to move down at the end of the day the price is settled at 103.
If you observe clearly the price actually moved from 100 to 103 only but the fight happened in lower side a bit and upper side a bit. So, when we talk about body of candle we only tell the real price move where we eliminate the fake moves
We say green part of the candle is called as Body of the candle. Why because the only portion of price actually moved on that particular day. We can say the real portion of trading in a stock is its Body.
What is a Wick (Shadow) in Candlestick
Some call as Wick and some call as Shadow.
We can say wick is a part of the candle where fight between Bulls and Bears happened. In the above image price came down to 98 from 100 which means the bears are pulled the price to 98 but at the price point 98 bulls came and started to Buy the sock and started to move up.
Here we can say100 to 98 portion is wick because even though price come to 98 not sustained for longer time and moved to upward direction.
What is Bearish Candle
In the above image we can see that Open price is 100 which means the price came down and after starting of the day and touched the 96 level and again moved up a little and closed at the end at 98.
In many charting terminals the bear candle is represented in red color but in some terminals they are represented in black. Bear candle is nothing but the fear which means the bears entered into the price, and they don’t want to hold the stock, so they sell the stock so the price comes down and red candle forms.
Candlesticks are nothing but the behavior of mass physiology of people who are participating in the stock. If they are thinking positive about the stock they buy and move the price up and ultimately a bullish candle forms. If people are not in good sign of any stock then simple sell ultimately the price come down and Bear candle form.