A candlestick chart is a graphical representation of the price movement of a security. It comprises a series of thin rectangles, with the rectangle’s length proportional to the price movement for the given time period. The period’s opening price is marked by a thin line at the top of the rectangle, and a thin line at the bottom marks the closing price. The colors of the rectangles indicate the direction of the price movement: if the rectangle is white, the price increases from open to close; if the rectangle is black, the price decreases from open to close. The candlestick chart is considered by many to be the most informative type of price chart because it clearly shows not only where prices closed for a given day but also how much volume was traded and at what price points. Keep reading to learn more about different candlestick chart types.
Table of Contents
Candle Chart Types
Candlestick charts are a type of chart which shows the high, low, opening, and closing prices of a security or instrument over a given period. Candlestick charts are so named because they resemble the shape of a candlestick. The body of the candlestick is the area between the open and close prices, and the candlestick’s wicks are the lines above and below the body that show the high and low prices.
Candlestick charts are used to track the price of a security or commodity over time. They are created by connecting the closing prices of a security or commodity for a given time period. The candlestick chart is divided into four sections: the body, the wick, the tail, and the shadow. The body is the section in the middle of the candle, representing the opening and closing prices. The wick is the section above the body and represents the high price for the given time period. The tail is the section below the body, representing the low price for the given time period. The shadow is the section that extends above and below the body, representing the range of prices for the given time period.
There are three primary types of candlestick charts: the line chart, the bar chart, and the candlestick chart. The line chart is a series of lines connecting the closing prices over time. The bar chart is similar to the line chart, but it instead has bars extending from each day’s open to its close, with the height of the bar indicating that day’s trading volume.
Bullish and Bearish Engulfing Candle Patterns
Bullish Engulfing Candle Pattern: A bullish engulfing candle pattern is a two-day pattern that signals a potential change in trend. The first day is a downtrend with a small candle, and the second day is an uptrend with a large candle that engulfs the body of the first candle. This pattern indicates that the buyers are stronger than the sellers and that the market may be turning bullish. The direction of the candlesticks determines the bullish trend: if the candlestick’s body is white or green, then the trend is bullish, and if the body is black or red, then the trend is bearish.
Bearish Engulfing Candle Pattern: A bearish engulfing candle pattern is also a two-day pattern that signals a potential change in trend. The first day is an uptrend with a small candle, and the second day is a downtrend with a large candle that engulfs the body of the first candle. This pattern indicates that the sellers are stronger than the buyers and that the market may be turning bearish. The direction of the candlesticks determines the bearish trend: if the candlestick’s body is black or red, then the trend is bullish, and if the body is white or green, then the trend is bearish.
The Piercing Pattern
The piercing pattern is a bullish reversal pattern that forms when a stock falls below the support of a trendline or moving average, rallies back above the trendline or moving average, and then falls back below the trendline or moving average again, but this time with less volume. The pattern is considered complete when the stock rallies back above the trendline or moving average for the third time. The piercing pattern can signal a trend change from down to up, or from sideways to up.
The Hammer
The hammer is a candlestick chart type used to identify potential reversals in a downtrend. A small body identifies it with a long upper shadow and little or no lower shadow. The length of the upper shadow indicates the extent of buying pressure that was present during the session, while the lack of a lower shadow shows that sellers could not push prices lower. This suggests that buyers are becoming more aggressive and could lead to a reversal in the downtrend.
Candlestick charts are necessary because they convey a lot of information at a glance. They determine the overall trend of security, spot buying, and selling opportunities and identify potential support and resistance levels.