What is a candlestick chart?

The candlestick chart is a form of graphical representation used to display the historical prices of an asset within a market, allowing the user to obtain a large amount of valuable information quickly and easily.

Una of the most demanding tasks of trading is to observe the price patterns within the market with the aim of predicting the future price. To facilitate this task, specialists have created charts that synthesize this information in a useful way. One of those tools is called candle chart.

Of Japanese origin, the charts of candles is the quintessential tool of traders. These charts serve to represent current and past market price information. Data such as the opening price, the closing price, the highest price and the lowest price in a certain time interval are part of the information shown by this chart.

For them the so-called «candlesticks» or candlesticks, a symbol that represents compressed trading activity for a single period (one minute, hour, day, month, etc.). Each candlestick is represented along a time scale in the X axis, to show commercial activity over time. While in the Axis y, the scale of prices reached in that time is represented.

This type of graphics are very useful for predicting market trends over time. They also serve to detect and interpret the "market psychology". This refers to the everyday feel of the market, through the color and shape of each candlestick symbol. For example, the longer the body, the more intense the selling or buying pressure. Whereas a very short body would indicate that there is very little price movement in that time period and can be interpreted as consolidation.

In addition they also help to identify factors such as fear or greed of those who act within the market. A situation that puts traders on notice in a working day.

History of the candle chart

The story behind the candle charts puts us in Japan in the mid-XNUMXth century. The creator of this tool was Munehisa Homma, a renowned rice merchant, and who received the name of "The Samurai Trader". In her daily work, Homma began to see repetitive patterns and signs on the price bars she drew before naming them. In this analysis, he managed to see configurations that are very popular these days (tapas, stars, doji, hammer, etc.).

Each model clearly conveys a special meaning and Homma was the first known human being to use these models to predict the future direction of rice prices. With the discovery of the analysis of the action of rice prices, Homma had a great advantage over other operators and combined with his passion and talent for trading.

This advantage has allowed her to become one of the greatest traders of all time. That was how he managed to get a significant fortune of close to 10 million dollars at that time. Later the technique was transferred to the West and began to be widely used in the mid-XNUMXth century.

Parts of a candle chart

The graph is made on a coordinate system x y y. Where he X axis, represents time, while the Axis y, represents the prices reached. Thanks to this representation, the candlestick charts can be adjusted in time, according to the needs of the market. This time setting is known as time rate, and typically represents units of hours, days, or weeks.

The main rectangle of the symbol is known as real body, and is used to display the range between the opening and closing price for that time period. While the lines that extend from the lower and upper parts of the actual body are known as lower and upper shadow (or wick).

Each shadow represents the highest or lowest price traded during the time period represented. When the candle is positive, the closing price is greater than the price at which the candle was opened. In these cases, the body is usually represented as white or green color. But when the candle is negative, the closing price is lower than the price at which it opened. In those cases the body is usually black or red color. Here we present it in an explanatory image:

How to read a candle chart?

To read a candle chart, it is important to keep in mind certain considerations. Among them we can highlight:

1. It is essential Analyze the context in which the candle appears. That is, what happened before it was formed. Candle guidelines can never be considered in isolation. Well, depending on where they appear and the previous trend, they will have more or less relevance.
2. It is important see the market trend. This will tell us if the candle patterns are consistent with the observed trend. This in turn makes it easier to recognize support and resistance in the price.
3. Due to its characteristics of objectivity, candle chart guidelines, allow to perfectly establish the stop loss.
4. Candlestick charting techniques are absolutely compatible with other market analysis techniques such as technical analysis o fundamental. That is why its consistent use together with these techniques will allow greater operational strength.
5. El real body represents the range between opening and closing of the candle while the upper shadow (uwakage) represents the maximum of the session, and the lower shadow (shitakage) represents the minimum.
6. El The interior of said range varies in color depending on whether the closure is greater than the opening or if the closure is less than the opening.. Thus, the white or green color is used when the closure is greater than the opening. And the color black or red, when the closing is less than the opening of the candle line.
7. A close above opening levels is a positive signal. Whereas if the closing is less than the opening, it is a negative signal.

Candlestick Chart Patterns

Among all the existing patterns, there are 42 the most common patterns. These are divided into simple and complex patterns, being useful to show the price relationships, and can be used to predict the possible future movement of the market.

Among them the most outstanding are:

Bullish Simple Patterns

1. Big White Candle: It has an unusually long white body with a wide range between high and low of the day. Prices open close to low and close close to high. Considered a bullish pattern.
2. white bodysuit: It forms when the closing price is higher than the opening price and is considered a bullish signal.
3. Doji: It is formed when the opening and closing prices are practically the same. Shadow lengths may vary.
4. Dragonfly Doji: It is formed when the opening and closing prices are at the highest of the day. If it has a lower shadow, it indicates a more bullish trend. When it appears at the bottom of the market it is considered a reversal signal.
5. Shooting Star: It is formed when a black or white candlestick has a small body. It is accompanied by a long upper shadow and a small or non-existent lower tail. It is considered a bearish pattern in an uptrend.
6. Marubozu: is formed exists when a long or normal candlestick (black or white) without shadow or tail. The maximums and minimums represent the opening and the closing prices. Considered a continuation pattern.
7. Long lower shadow: This forms a black or white candlestick with a lower tail that is 2/3 or more in length from the full range of the candlestick. It is normally considered a bullish signal when it appears around the price support levels.

Bearish Simple Patterns

1. Big Black Candle: It has an unusually long black body with a wide range between high and low. Prices open near the high and near the low. Considered a bearish pattern.
2. Hammer: It is formed when there is a black or white candlestick consisting of a small body near the top with little or no upper shadow and a longer, lower tail. Considered a bullish pattern during a downtrend.
3. black bodysuit: this pattern appears when the opening price is higher than the closing price. Considered as a bearish signal.
4. Gravestone Doji: It is formed when the opening and closing prices are at the lowest of the day. If it has a longer upper shadow, it signals a downtrend. When it appears at the top of the market it is considered a reversal signal.
5. Long upper shadow: It is formed when a black or white candlestick with an upper shadow that is 2/3 or more in length from the full range of the candlestick. It is normally considered a bearish signal when it appears around price resistance levels.

Complex patterns

hanging man: The Hanging Man or Hanging Man Japanese Candlestick Pattern is bearish forecast. It consists of a single Japanese candle. It is analogous to the Hammer pattern. It is similar to the Dragonfly Doji pattern, and in this case the opening and closing prices are identical, while the hanging man pattern the candle has a small body.

Shoulder-Head-Shoulder: This is an accurate reversal pattern that can be used to enter a bearish position after an uptrend. It consists of three roofs in which the central maximum is highest, called the head. The line connecting the two valleys is the neck line («neckline«). The height of the last ceiling can be higher than the first, but not higher than the head. In other words, the price tried to reach a higher high, but failed. The closer the two outer tops are to the same price, the more accurate the pattern is.