what is a candlestick chart?

Candlestick analysis is a powerful knowledge for deciphering market fluctuations and predicting the direction of price movement. Rooted in Japanese history, this analytical method uses candlestick patterns to provide deep insight into market psychology and sentiment.

In this article, we will deal with candlesticks and get acquainted with its basic concepts, including the components of candlestick charts and types of bullish and bearish patterns. The purpose of publishing this article is to equip you with the necessary tools to independently analyze Japanese candlestick patterns and make wiser decisions in your trades; because by mastering this knowledge, you will be able to look more delicately at price fluctuations, identify suitable entry and exit points, and significantly increase the probability of your success in trading.

Stay with us to take a step towards improving your analytical knowledge and trading skills in this field.

What is a Candlestick?

A candlestick is an intuitive and efficient tool for displaying information about price movements in financial markets. Known as one of the most popular technical analysis tools, these charts allow traders to interpret prices quickly and with greater clarity. As a matter of fact, candlestick works like a language for understanding Japanese candlestick charting and patterns; It also helps analysts and traders in making decisions by providing a clear picture of the price behavior of an asset.

In candlestick patterns, time is displayed on the horizontal axis and price is displayed on the vertical axis. Each candlestick represents a specific time period such as a day, a week or a month and has various components that summarize the price information of that period.

The main components of candle patterns

1. Body: The body of the candlestick is a solid or hollow rectangle that shows the start and end price of the trade in the time frame specified by the chart.

• Bullish candle: If the closing price is higher than the opening price, the body of the candle will be displayed in green or white.
• Bearish candle: If the closing price is lower than the opening price, the body of the candle will be displayed in red or black.

2. Wick: Wicks are thin lines that extend from the top and bottom of the candle body. They represent the highest and lowest prices in the respective time frame.

• Upper wick: The maximum price reached during the time frame.
• Lower wick: The minimum price reached during the time frame.

3. Color: As mentioned earlier, the color of the candle body indicates the direction of the price movement.

• Green or white: Bullish (The closing price is higher than the opening price)
• Red or black: Bearish (The closing price is lower than the opening price)

By understanding these simple components, one can visually interpret price information on candlestick charts and use them to analyze trends and make wise trading decisions.

Getting to know the types of candles

In the world of technical analysis, candlestick patterns play a guiding role and help traders in predicting the price path of securities. These patterns, which consist of a combination of price candles, fall into two general categories, including:

Reversal patterns: These patterns indicate a possible change in the current price trend. Reversal patterns include signals that can be a turning point in the chart and the beginning of a move in the opposite direction of the previous trend.

Continuation patterns: These patterns indicate the continuation of the current trend. Meanwhile, by identifying these patterns, traders can recognize rest periods in the market. Continuation patterns sometimes keep the price in a neutral state for a while and sometimes resume the previous trend with renewed momentum.

Candlestick analysis tutorial

As you know, candlestick patterns have become a popular tool among traders by displaying information attractively. Candlesticks, forming certain patterns over time, can be helpful in identifying support and resistance levels and identifying trading opportunities. However, mastering the knowledge of candlesticks, which includes understanding the various patterns and the information they provide, is essential before getting into actual trading. You can gain a lot of knowledge in this field with the help of Coinoverse, which is an excellent educational resource. Don’t forget that although candlesticks are helpful in quickly predicting trends, other technical analysis tools should always be used alongside them to confirm the correctness of the overall trend. Using candlestick patterns alone can be misleading and relying solely on them is considered a risky decision; therefore, always consider the comprehensive analysis of the market and the examination of other indicators along with candlesticks.

The benefits of mastering the knowledge of candlesticks

1. You will be able to recognize the general trend of the market at a glance.
2. You will be able to identify the right entry and exit points for your trades.
3. You will be able to predict the probability of future market events.
4. By relying on technical analysis, you will be able to reduce the risk of your transactions.

Advanced Candlestick analysis: Bullish Patterns

In technical analysis, Japanese candlestick patterns are a valuable tool for predicting future market trends and making wise trading decisions. Bullish patterns that appear at the end of a downtrend indicate a possible price increase and an opportunity to get into buying trades.

Hereon, there are 9 prominent ascending candlestick patterns, each of which has its own elegance and application.

1. Hammer: This pattern appears with a short body and a long lower wick (at least twice the size of the body) at the end of a downtrend. Its upper wick is short or there is no upper wick. The hammer indicates that the buyers will overcome the selling pressure and the possibility of the start of the upward trend. Green hammers are more likely to rise than red hammers.

This pattern is formed when the closing price is at a higher level than the opening price.

2. Inverse hammer: This pattern is similar to a hammer and is one of the most used candlestick patterns in the financial markets; with the difference that the upper wick is long and the lower wick is short or there is no lower wick. The reverse hammer indicates a reduction in selling pressure and the gradual entry of buyers, who are likely to take control of the market in the near future.

The upper wick is about 2 times the size of the actual body of the candle; The body represents the difference between the opening and closing price.

3. Bullish engulfing: This pattern consists of two candles: a red candle completely surrounded by a larger green candle. Bullish engulfing shows the strength of buyers and their overcoming the downward trend.
4. Piercing line: This pattern consists of two candles: one long red and one long green. There is a significant gap between the closing price of the red candle and the opening price of the green candle, which indicates strong buying pressure.
5. Morning star: This three-candlestick pattern consists of a short candle (green or red) between two long red and green candles. The third candlestick (green) should cross 50% of the body of the red candlestick. This pattern shows the reduction of selling pressure on the first day and the possibility of an upward trend in the future.
6. Three white soldiers: This pattern consists of three consecutive long green candles with small wicks, each opening and closing at a higher price level than the previous day. Three White Soldiers is a strong bullish signal after a bearish trend and indicates the continued increase in the strength of buyers.
7. Rising three methods: This pattern consists of a long green candle followed by three red candles with small bodies. The fifth candle will also be a tall green candle. This pattern shows that buyers are maintaining control of the market, despite the selling pressure.
8. Bullish Maraboso: This pattern consists of a green candlestick that is longer than the previous ones (usually 2.5-3x) with little or no wick. The bullish Maraboso indicates the extraordinary power of buyers and the possible increase in trading volume. The downward trend is expected to stop after viewing this pattern.
9. Bullish Harami: This upward reversal pattern appears at the end of a downward trend and indicates the possible beginning of an upward trend (bull market). In the bullish Harami, the mother candle is red and the child candle is green, and the entire second candle is within the range of the first candle.

Advanced candlestick analysis: bearish patterns

1. Hanging man: This pattern consists of a candle with a long body and a long lower wick. It shows the lack of sufficient power of buyers to maintain high price levels.
2. Shooting star: This pattern consists of a candle with a short body and a long upper wick. It indicates sudden selling pressure at the end of an uptrend.
3. Bearish engulfing: This pattern consists of two candles. The first candle is green and the second candle is red, which completely covers the first candle. It indicates the strength of sellers and the possibility of price decline.
4. Evening star: This pattern consists of three candles. The first candle is green, the second candle is short (green or red) and the third candle is red. It indicates the reversal of the upward trend and the possibility of a price decrease.
5. Three black crows: This pattern consists of three long red candles with short or no wicks. It shows the continuation of the downward trend and absolute power of sellers.
6. Dark cloud cover: This pattern consists of two candles. The first candle is green and the second candle is red, which covers the body of the first candle and closes below 50% of it. It indicates the sudden power of the sellers and the possibility of a sharp drop in the price.
7. Falling three methods: This pattern consists of candles such as one long red candle, three short green candles and another long red candle. It shows the weakness of buyers in maintaining the upward trend and the possibility of continuing the downward trend.
8. Bearish Marubozu: This pattern consists of a long red candlestick with a short wick or no wicks. It shows the absolute power of sellers and the possibility of a sharp price drop.
9. Bearish Harami: This pattern consists of two candles. The first candle is green and long, and the second candle is red and short, which fits completely in the first candle. It shows the weakness of buyers and the possibility of reversal of the upward trend.

Types of Doji candlestick patterns

Doji candlestick patterns are used in technical analysis and candlestick analysis to identify the equilibrium point between buyers and sellers and the possibility of changing the trend. These patterns often appear with small bodies, even lines and long wicks. These patterns are:

1. Doji: This basic pattern shows the equality of power between buyers and sellers and is not a definitive signal for trading by itself.
2. Spinning top: This pattern is known as curl and it shows the uncertainty in the market and the possibility of the trend not changing. The wicks of this candle are usually the same size.
3. Dragonfly Doji: This pattern is formed by a long lower wick and little or no body. It shows the initial selling pressure and price return by buyers.
4. Gravestone Doji: This pattern is formed by a long upper wick and little or no body. It indicates initial buying pressure and price reversal by sellers.

It is worth noting that some Japanese candlesticks fall into the category of basic and main patterns, which include Doji, Marubozu, and Spinning top.

Conclusion

In the dynamic world of trading and investing, mastering candlesticks is the key to success. Meanwhile, Japanese candlestick patterns, as a popular and efficient tool, play an essential role in market trend analysis. Familiarity with candlesticks and different types of candlestick patterns will help you to take a step towards a deeper understanding of market movements and make a more accurate prediction of transactions.

It should be noted that we want to help you take a big step towards improving your knowledge and skills in the field of technical analysis at Coinverse, by providing accurate and up-to-date educational content.