Candlestick patterns are crucial to understanding the stock market, but where did the concept come from and what do you need to know?
The Japanese Influence
Candlestick charts have been used as far back as the 1800s! Originating in Japan, a rice dealer named Homma Munehisa used the technique to measure trade and prices among traders. The style was introduced to the rest of the world in the 1980’s by Steve Nison when he wrote his book “Japanese Candlestick Charting Techniques.” Today it’s a hugely popular instrument to measure price action in the stock market.
Candlestick’s Japanese roots still linger with terminology such as “Doji” meaning “same time” in Japanese, because a doji is a candle without a body that illustrates a time period where the closing price was the same as or very close to the opening price. A doji suggests balance between buyers and sellers, but can also foreshadow either a bearish or bullish reversal.
The Heikin-Ashi method, which means “average bar,” is a way to measure the average of price action, to help traders identify patterns and trends. This technique was also developed by Homma Munehisa, and is in a lot of regards, a modified version of the traditional candlestick chart. As traditional candlesticks can often be difficult to interpret due to the fluctuations of each individual candle, this method makes trends appear clearer. However, it is advised to look at both traditional candles and heikin-ashi candles before deciding what to do with shares.
Whenever you hear a trader say Candlestick Patterns, or Japanese Candlestick Patterns, they mean the exact same thing.
What are candlestick charts
The doji was already established to be candle without a body representing a time period where the opening price and closing price were the same or similar, but what about full bodied candles?
There are two types of full bodied candles; bullish and bearish candles.
A bullish candlestick has a white or green body and means that the price went up during the period. Traders talking about a Bullish Market mean that price action is increasing. A bearish candlestick is the opposite, this red or black candle means that the price decreased during the period. In this instance, traders will say that the market is bearish. The base of a bullish candle represents the opening price while the top is the closing price. On a bearish candle, the base is the closing price, and the top is the opening price, this makes sense as it visually depicts the price falling during the period.
Many candles have a line coming from the base and tip, this is known as the wick, but is often also called the shadow or tail. This shows the highest and lowest price during the period, with the lowest price coming out of the base and the highest from the top of both bullish and bearish candles. Full bodied candles are not the only ones to have wicks, as dojis can have them too.
Trending candlesticks
Understanding the trends and patterns candlestick charts take is vital for day traders and active traders who buy and sell shares in the stock market during the same day. These traders would look at charts where each candle represents a period of time during the day, for example, each candle representing five minutes, half an hour, or more of the given day.
A trending candlestick confirms and continues the trend, while a non-trending candlestick is an anomaly. While most candles have wicks, and including trending candles, candles without a wick suggest a strong trend during the period.
When it comes to analyzing candlestick patterns, context is important. Many patterns look similar, and the only distinguishing factor is the context. For example, the shooting star, which is a bearish pattern, looks similar to an inverted hammer is bullish. The identifying factor for a shooting star is three bullish candles in a row which rise with each candle and then a bearish candle with a wick at the top that is at least twice as long as the candle itself. The big distinguishing factor is the fact that a shooting star can only be found at the very top of an uptrend, while the inverted hammer is only found in downtrends.
A Morning Star is recognised by three bullish candles rising upwards after a period of bearish candles, the first of the morning star rising from the latest and lowest bearish candle, and each after increasing in value. The Evening Star is the antithesis of this pattern where the most recent and most valuable bullish candle is followed by three consecutive bearish candles, each falling lower and lower. Think of these like the sun rising and setting on price.
Overwhelmingly bullish trends include the Supernova and the Stair Stepper. The Supernova is a sudden increase in price which can be triggered by almost anything, such as a viral post on social media or world news. Stocks during a supernova are volatile which makes it a good time to short sell during the inevitable comedown. A stair stepper moves upwards like the stairs of a step, the resistance between buyers and sellers can be noted in the bearish and dojis that keep it from moving in a straight line upwards. As it’s a slow but steady bullish pattern it’s more predictable but that doesn’t mean that it’s immune from reversing without warning either.
Trends to avoid include the Snore, named fittingly for its lack of action, while the Snore might not be mostly made up of dojis, the bullish and bearish candles don’t have much difference between them. The best thing to do during a snore is not to trade during it.
Trends won’t be as simple as a straight-forward route of either only bullish or bearish candlesticks, and sometimes a trend might not unfold the way you think it was. Stocks can be unpredictive at the best of times, but if you know your stuff you can make smart investments by watching candlestick patterns. You will get to know more about it by checking https://www.timothysykes.com/blog/candlestick-patterns/.
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