Trading Candlesticks

Compared to traditional OHLC bar charts, many traders consider candlestick charts more visually appealing and easier to interpret. Each candlestick provides an easy-to-decipher picture of price action. An analyst can quickly understand the relationship between the opening and closing price as well as the high and low price.

Learning Tip

Candlestick trading is one of the most popular chart trading. A good understanding of candlesticks will help you to understand stock price movement in a great and easy way.

Understanding

How to Use Candlesticks?

Candlesticks with green bodies indicate buying pressure and red bodies indicate selling pressure. Long upper or lower shadows form when the market moves significantly in a particular direction during the day and then reverses before the end of the day. As a result, long lower shadows can infer bullishness while long upper shadows can infer a bearish market.

If the closing price is higher than the opening price, the body will be displayed green. If the closing price is lower than the opening price, the body will be filled red with the following exception; if the closing price is higher than the previous day’s closing price, the body will then be filled green.

Major Types

Four Major Types of Candlesticks

Market psychology is reflected in each of these candlestick formations in the following ways.

Up Day, Higher Close: Typically results from expectations of higher prices (greed) out weighing expectations of lower prices (fear). The length of the candlestick body shown indicates especially strong buying.

Down Day, Lower Close: Expectations of lower prices (fear) are stronger than those of higher prices (greed). As with the first candlestick, a longer candlestick body infers greater urgency of investors to sell their shares.

Down Day, Higher Close: A rare candlestick, this one begins with an opening gap up in price from the previous day’s closing price but closes down for the day. In this case, heavy buying at the beginning of the day reversed but still closed higher than the previous day. This is a bearish sign when it occurs well into an upward price move.

Up Day, Lower Close: Another rare candlestick, this one begins with an opening gap down in price from the previous day’s closing price but closes up for the day. This price action can be considered bullish during a downward price move since initial strong selling in the day becomes exhausted and buyers push the price higher at close.