Japanese Candlestick Patterns
Candlestick charts are a type of financial chart for tracking the movement of securities. They have their origins in the centuries-old Japanese rice trade and have made their way into modern-day price charting. Some investors find them more visually appealing than the standard bar charts and the price actions easier to interpret.
Candlesticks are so named because the rectangular shape and lines on either end resemble a candle with wicks. Each candlestick usually represents one day’s worth of price data about a stock. Over time, the candlesticks group into recognizable patterns that investors can use to make buying and selling decisions. Candlesticks have different body sizes and this is very important in trading. Long bodies indicate strong buying or selling while short bodies imply very little buying or selling activity. Investors should use candlestick charts like any other technical analysis tool (i.e., to study the psychology of market participants in the context of stock trading). They provide an extra layer of analysis on top of the fundamental analysis that forms the basis for trading decisions.
Bullish, Bearish and Indecision Candlestick Patterns
Unlike chart patterns, candlestick patterns focus on single or a group of candlesticks and their open, high, low and close prices. The upper and lower shadows of a candlestick, and the size of its body are of most importance. While candlestick patterns are generally grouped into reversal and continuation patterns, some traders classify them based on whether they’re bullish or bearish. A reversal pattern that forms at the bottom of a downtrend is basically a bullish pattern, the same as a continuation pattern during an uptrend. On the other side, a reversal pattern that forms at the top of an uptrend and a continuation pattern that forms during downtrends are essentially bearish patterns. Indecision candlestick patterns signify that both buying and selling pressure is in equilibrium.
Just like other technical tools, Japanese candlestick patterns don’t always work. You’ll need to gain experience in identifying candlestick patterns in order to successfully combine them with your existing trading strategy. Traders should avoid trading on candlestick patterns alone. Look at the bigger picture and identify important support and resistance levels, chart patterns, trendlines and channels, and use candlestick patterns only to confirm a buy or sell setup.