How to Read Candlesticks Charts- Candlesticks Patterns Analysis

In this article, you will learn How to Read Candlesticks Charts- Candlesticks Patterns Analysis.

The candlestick word came from the western and discovered by Steve Nison. In Japan, it is called ‘Ashi‘ which means “foot” or “leg”.

To draw an candlesticks chart or pattern we require the following things:

• Low
• Open
• Close
• High

How to Draw a Candlesticks charts?

To draw the Candlesticks, follow the step by step guide given below:

1. First of all, mark the open and close price.
2. Then, box up the open and close and the boxed up rectangle is called as the real body. This denotes the movement of the price. If the close is higher than the open, then this candle is coloured white candle or green candle. If the close is lower than the open price, then the candle is coloured as black or red candle.
3. After that, mark the highest price and join this point with the top of the real body. This thin wick is called as the upper shadow.
4. Lastly, mark the lowest point and join this point to the lower real body box. This think wick is called as lower shadow.

Some important points about Candlesticks charts:

• If a candle has no upper shadow then it is called shaven head.
• If a candle has no lower shadow then it is called shaven bottom.
• If a candle has no real body i.e the open and close price of candle are almost same, then it is called doji or indecisive candle. In this case, both bulls and bears are in equilibrium.

Now we will discuss different types of candle stick patterns:

Also Read How to Invest in Stock Market For Begineer

Single Candlesticks charts Pattern

Many trades are being taken on the basis of single candlestick pattern on different time frames. The purpose of the single time frame are:

• To understand the psychology of the traders specially institutions.
• To investing get the relationship of the candle with other candles.
• Helps the traders to buy, hold or sell a particular stock.

To understand the psychology of the investor or trader following three things matters the most.

• Size of the Candle
• Location of Candle
• Colour of Candle

If the size of the candle is large then it indicates there is a power and strength for this size movement and it also indicate the market volatility.

Though the size of candle is very powerful but one need to check the color as well. If it is green or white, it means bulls are in total control and if the color of the candle is red or black then it indicates bears are in control.

The location of the candle is also very important as it is building at the top or bottom of the chart signals any reversal pattern.

So, all these three things matters the most while selecting any stock to invest or trade.

Some Single Candlesticks Charts Types

Following are some single candlesticks types:

1. Marubozu
2. Shooting Star
3. Hanging Man
4. Hammer
5. Inverted Hammer
6. Spinning Top
7. Doji

we will understand it one by one:

1. Marubozu Candlesticks Charts

In the case of Marubozu Candlestick, there is greater difference between price and close price. The candle closes at higher price aa compared to the open price. In this case, the open price is equal or nearly equal to the low price and close price is equal or nearly equal to highest price. It is considered as very bullish candle if the candle is green or white. This types of candles generally seen when there is activity from institution as well.

2. Shooting Star

In this case, the candle’s close is greater than the open price. The upper shadow must be at least two times as compared to the real body of the candle. It has a small real body and long upper shadow.

It is called shooting star if it is found at top of the market and inverted hammer if at the bottom of the market.

Shooting star is a sign of reversal of found at the top of the chart and generates a sell signal most of the time.

3. Hanging Man

In this case, the candle’s close is greater than the open price. The lower shadow must be at least two times as compared to the real body of the candle. It has a small real body and long lower shadow.

It is called Hanging Man if it is found at top of the market and hammer if at the bottom of the market.

Hanging Man is a sign of reversal of found at the top of the chart and generates a sell signal most of the time.

4. Hammer

In this case, the candle’s close is greater than the open price. The lower shadow must be at least two times as compared to the real body of the candle. It has a small real body and long lower shadow.

Hammer is a sign of reversal of found at the bottom of the chart and generates a buy signal most of the time.

5. Inverted Hammer

In this case, the candle’s close is greater than the open price. The upper shadow must be at least two times as compared to the real body of the candle. It has a small real body and long upper shadow.

Inverted Hammer is a sign of reversal of found at the bottom of the chart and generates a buy signal most of the time.

6. Spinning Top

In spinning top candlestick, the close of the candle is higher than the open but in this case, the real body of the candle must be smaller than the sum of the upper and lower shadow of that candle. This candle is indecisive and considered as neutral candle.

7. Doji Candlestick

The doji Candlesticks charts is one of the most important candlesticks. A doji candle is formed when the open, and close price are same. The lower and upper shadows can be longer or shorter. If the shadow is longer it is considered as volatile day. If the shadow is shorter, it is considered as sideways or dull day. There are four types of doji Candlestick which are given below:

• Four Price Doji
• Gravestone Doji
• Long-legged Doji
• Dragonfly Doji

Frequently Asked Questions