November 16, 2010 by akhilendra

Candlestick chart

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In one of my previous post we have already gone through candlestick chart. But that was a very basic overview; today we are going to have a closer look on it. As mentioned in that previous post those candlestick charts was developed in Japan and were mainly used by the rice traders. But over the years, they have developed as one of the most favorite and commonly used chart by the equity traders across the globe.

Open, high, low and close values for any time periods are used to create candlestick chart. The hollow or colored portion is called body and thin line above and below is called shadows (sometime called as wick or tails). Shadows represent the high and low price of a stock.

In case of a hollow bar, high is marked by the top of the upper shadow and the low by the bottom of the lower shadow.

In case of a filled bar, top of the body represents the opening price and the bottom of the body represents the closing price.

Many technical chart analysts use them because they feel it is easier to learn and interpret. When the prices close below the opening price, it is represented by a filled bar i.e. when price falls it will create and a filled bar whereas when prices move up i.e. when price closed above the opening price , it will create a empty or hollow bar.  The size of the bar, empty or filled, is very important because it reflects the strength of the respective move. For example, there is long or tall filled bar, it means that the fall was very strong and bears were playing at full strength whereas in case of a hollow bar, it reflects the strength of bulls.

Points to remember while using a candlestick chart,

1. Longer body represents intense move, up or down.
2. Upper and lower shadows are very important because they represent the highs and lows of the day, when they are long it shows that stock moved in a long trajectory before closing at a certain period whereas short shadow represent that stock moved in a narrow range before closing down.
3. Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated the session, and prices moved in higher trajectory for most of the session but later bear dominated the session and the lower close created a long upper shadow. Conversely, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated majority of the the session and drove prices lower. However, buyers later became active to push prices higher by the end and a higher close created a long lower shadow.

Few Important formations in Candlestick charts;

Spinning tops – candlestick with long upper and lower shadows with a small body is called spinning tops. Spinning tops represent indecision and often formed during a volatile session and bull and bears are confused and stock doesn’t take any decisive move.

Doji– It is one of the most important formations in a candlestick chart. It represents indecision which basically happens in a volatile market. It might be a indication of a trend reversal. They are formed when opening and closing prices are almost equal and they look like a plus symbol. They are neutral on their own but indicate preceding trend bias which may be bull or bear.

Harami Position– it is formed when a candlestick that forms within the real body of the previous candlestick. Harami is Japanese word which mean pregnant and the second candlestick is nestled inside the first. The first candlestick usually has a large body and the second a small body. Doji and spinning tops have small real bodies, and can form in the harami position as well.

Hammer and Hanging man– Hammer is a bullish pattern reversal trend and hanging man is bearish trend reversal. The hanging man is represented by a filled candlestick and a hammer is represented by a empty stick. They look quite similar but are exactly opposite in nature.

Star position-When a candlestick gap away from the previous one, it is known as star position.  The first candlestick will have a large body and next one will have a small body. They are called gap up or down based on the position of small candlestick.

These are few important features of a candlestick chart. It require a lot practice to understand and recognize future trend, so it is very important to go through different chart of different time frames to understand them. Nobody is perfect and only time and effort can take study to a higher level, so try to learn more and more about it and share with us also.

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