Candlesticks Explained: Trading Signals

What is a Candlestick?

A candlestick is a type of price chart used in trading analysis that shows the high, low, open, and closing prices of a specific trading market for a specific period of time. The wide part of the candlestick is called the "real body" and tells investors whether the closing price was higher or lower than the opening price.

Two Types of Candlestick:

There are two types of candlesticks: Green and Red. The Green candlestick (also known as Bullish candlestick) shows when the closing price was higher than the opening price and the Red candlestick (also known as Bearish candlestick) shows when the closing price was lower than the opening price.

Green (Bullish) Candlestick

Long green candlesticks indicate there is strong buying pressure; this typically indicates price is bullish (rising share prices). However, they should be looked at in the context of the market structure as opposed to individually.

Red ( Bearish) Candlestick

Long red candlesticks indicate there is significant selling pressure; this suggests the price is bearish (falling share prices).

Why use Candlesticks?

Mainly to make important decisions where and when to sell or buy trades. Candlesticks reflect the impact of investor sentiment on security prices and are used by technical analysts to determine when to enter and exit trades. Candlesticks are a suitable technique for trading any liquid financial asset such as stocks, foreign exchange and futures.

Candlestick Patterns

Double Candlestick Chart Pattern For Trading

A common bullish candlestick reversal pattern, referred to as a hammer, forms when price moves substantially lower after the open, then rallies to close near the high. The equivalent bearish candlestick is known as a hanging man. These candlesticks have a similar appearance to a square lollipop, and are often used by traders attempting to pick a top or bottom in a market.

Two-Day Candlestick Trading Patterns

There are many short-term trading strategies based upon candlestick patterns. The engulfing pattern suggests a potential trend reversal; the first candlestick has a small body that is completely engulfed by the second candlestick. It is referred to as a bullish engulfing pattern when it appears at the end of a downtrend, and a bearish engulfing pattern at the conclusion of an uptrend. The harami is a reversal pattern where the second candlestick is entirely contained within the first candlestick and is opposite in color. A related pattern, the harami cross has a second candlestick that is a doji; when the open and close are effectively equal.

Three-Day Candlestick Trading Patterns

An evening star is a bearish reversal pattern where the first candlestick continues the uptrend. The second candlestick gaps up and has a narrow body. The third candlestick closes below the midpoint of the first candlestick. A morning star is a bullish reversal pattern where the first candlestick is long and black/red-bodied, followed by short candlestick that has gapped lower; it is completed by a long-bodied white/green candlestick that closes above the midpoint of the first candlestick.

Use This Stock Chart to "See" Your Trades Like a Pro | Nasdaq

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