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Candlestick charting overview PDF Print E-mail

Overview

Candlestick charting was popularized in Japan and has received world wide recognition. Each candlestick is composed of four values, the high, low, open and close. The advantage to this form of charting is that it provides more visual information about the trading day as well as many trading signals to help decision making.

The body of the candlestick (or jittai) is the open and the close of the trading day. The high and the low of the day create the upper and lower shadows of the main candle body.

(Most charting programs will allow you to use other colors in the bar, typically green for white candle and red for black candle)

Types of Candles

With candlestick charting, there is quite a lot of terminology and meaning towards the types of patterns encountered. Significance is given to the size ot the shadows, the size of the candles as well as the pattern the candles form.

A marabozu, or "shaved head", is a candlestick with no shadows. This is where the open and close prices are similar to the high and low.

An opening bozu in a white candlestick is when there is no lower shadow (opens at the low) and in the case of the black candlestick an opening bozu has no upper shadow (opens at the high).

A closing bozo in a white candlestick is when there is no upper shadow (it closes at the high) and in a black candle a closing buzo is when there is no lower shadow (it closes at the low).

Doji

A Doji candlestick is one of the more common candlesticks. The Doji signifies a balance of buyers and sellers and shows an indecisiveness in the price. Doji's are not very significant by themselves, but if a Doji occurs after a large candle a stronger signal is generated (see bullish and bearish patterns).

Size of Candles

The size of the candlestick gives the trader an indication of buying (white candle) or selling (black candle) pressure. The larger the candle, the more buying and selling pressure, short candlesticks on the other hand represent a period of consolidation and weak buying or selling pressure.

Size of Shadows

 

Upper shadows represent buyer action which pushes the price up. Lower shadows represent seller action which pushes the price down.

The size of the shadows tells us the amount of price action that occured during the day as well as the activity of buyers and sellers.

Short shadows show a balance of buyers and sellers (a consolidation).

 

If both shadows are short (as well as the candle), this represents a weak trading day where prices had little movement. This shows a balance of sellers and buyers. If there is low volume with a short small candle, this shows a weak market day.

 

 

Candles with a long upper shadows and a small lower shadow represents a trading day were the buyers forced the price up during the trading day but sellers later won.

Candles with long lower shadows and small upper shadows signifies that the sellers dominated the opening while the buyers pushed the price up at the end of the session.