Japanese candlesticks represent a stocks price range over a specified time frame. There are two basic price action moves that a candlestick will show us. First an upward movement in price that will be represented by either a green or white body. Second a downward movement in price which will be represented by a red or black filled body. The body which will tell you what price the stock was at the open and close of our time frame, and second the "wick" or shadow which tells us the highest price and lowest price that our stock traded during the specific time frame. See the images below to gain a better understanding.
The Japanese first used technical analysis and candlesticks in the 1700's to trade rice. This idea was slightly different than the U.S. version that later came to light by Charles Dow around 1900. Though Japanese candlesticks have evolved and changed over the years the basic principle behind them remains true to this day.
1. Price action is more important than news, earnings or other fundamental guidelines
2. All known information is reflected in a stocks price.
3. Market movements are based off the emotions of fear and greed.
4. The actual price may not reflect the actual Value
Upward Price Movement
Downward Price Movement
Candlestick Time Frames:
Each candlestick formation represents a specific time frame. 1 minute, 2 minute, and 5 minute candlesticks are commonly used by intraday traders or day traders. 10 minute, 15 minute, 30 minute, 60 minute, or daily candlesticks are generally used by swing traders and what we will commonly use. It can go out even further to weekly candles or monthly candles to provide price action over large time periods such as months or years. Large bodied candles represent a strong push in either buying or selling while smaller bodied candles represent consolidation. Consolidations are a very important part of technical analysis and swing trading.
Bullish and Bearish Candlestick Formations:
Positioning and Placement:
The position and placement of a candlestick within a stock chart are very important. For example If a hammer candle is found near a top or resistance area it would generally be considered more bearish and called a hanging man. The same goes for the Inverted hammer, if this is found near a bottom or support area it would be considered bullish instead of the normal bearish. Look below for a couple of examples of these.
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Candlestick formations can help traders identify direction changes in upcoming price action. Candlesticks like every other part of trading are not guaranteed to work 100% of the time and should only be used as a guide. Simply buying every single dragon fly doji will not yield a 100% success rate, though they can offer a great risk vs reward setup at the bottom of a trend. Check out some of the basic candlestick formations below.