Analysis of Candlestick Charts

A candlestick is a Japanese price chart that is formed by the following elements:

• Open: refers to the open price
• Real body: refers to the filled part of the candlestick 
• Upper and lower shadows: the lines above and below the real body.
• High: refers to the top of the upper shadow
• Low: refers to the bottom of the lower shadow.
• Close: refers to the close price.

There are two types of Candlesticks: Bullish candlesticks and Bearish candlesticks.

If the close price is above the open price this means that the candlestick is bullish. However, if the close is below the open, it means that the candlestick is bearish.

Advantages of Japanese Candlestick Charts

1. They provide a visual representation of what is going on in the market
2. They accurately indicate a market trend, i.e. whether the market is going up or down.
3. They can be used alone or with other technical analysis tools such as trend lines, moving averages or the elliott wave theory

Types of candlestick chart patterns

1. Hammer

A hammer is also known as a pin bar. It has a long lower shadow and little to no upper shadow. The pattern’s body is small and can be black or white.

When the hammer appears at the bottom of a downtrend then it indicates a trend reversal. 

  2. Shooting star

This is also referred to as a bearish pin bar.
It has a long lower shadow and little to no upper shadow.
The real body is very small and can be black or white.

When this pattern occurs in an uptrend, it indicates a bearish reversal signal.

  3. Doji

A situation when open prices equal close prices is called Doji. 
This candlestick pattern indicates indecision between buyers and sellers hence it indicates that the market will reverse. 
A doji can be used by a trader to determine entry points and points to close trades.

  4. Engulfing bar

It is another reversal pattern that consists of a body engulfing a preceding smaller body. 
When a large white body is engulfing a smaller black body this is known as Bullish engulfing. It usually occurs at the bottom of a down trend.

A bearish engulfing bar consists of a black body engulfing a smaller white body at the top of an up trend.

  5. Morning star

It is a combination of three candlesticks that occur at the bottom of a downtrend.

It is a combination of three candlesticks that occur at the bottom of a downtrend.
The first candlestick is bearing in nature indicating that the market is in a downtrend.
The second candlestick is a small one and it can be bearish or bullish in nature.
The third candlestick is bullish in nature and it closes above the midpoint of the first candlestick.
This pattern indicates a trend reversal.

  6. Evening star

It is a bearish version of the morning star that occurs at the top of an uptrend. 

It consists of three candlesticks:

• The first one is a bullish candle
• The second is small and can be bullish or bearish in nature
• The third candlestick is bearish in nature

  7. Tweezers tops and bottoms

This pattern indicates a trend reversal. It consists of two large bodies that are almost of the same height with little to no shadows. 

The tweezers top pattern consists of two candlesticks: 
The first one is a bullish candle followed by a bearish candlestick
The tweezers bottom is the bullish version of the tweezers top.

  8. The inside bar

This candlestick pattern is also known as the Harami pattern
It is considered as a reversal pattern and a continuation pattern.
It consists of two candlesticks:
The first one is a large candle and the second one is smaller than the first one and it closes inside the first candle.

When this pattern occurs during an uptrend or downtrend it is interpreted as a continuation pattern. However, if it occurs at the peak of an uptrend or at the trough of a downtrend it is interpreted as a trend reversal pattern.