Technical Analysis - Candlestick
- Yash Mehta
- May 23, 2021
- 6 min read
Updated: May 25, 2021
This would be the last part of basics of technical analysis and after this we will start with higher-level topics. Candlestick and Volumes itself is a big topic and understanding it is a little difficult. I will try my best to simplify this for all of my friends. We discussed candlestick charts in our first blog of this series: Starting with Charting, Tools and Setup. In that we have studied on how to set up candlestick chart on different trading platforms. After that we have studied about Identifying Trend in Market. Next two blogs after this is the most important Demand and Supply and Resistance and Supply. Adding to this, we will discuss basic types of candlestick, which will build our core foundation.
This blog will be very interesting because it will enlighten you towards technical analysis world so read it when you are in a calm state. If you have missed any of the blog prior or want to revise any topics, then please do that by clicking on the highlighted text. It will help you to understand this topic in a simple and effective way.
Candlestick
All this candlestick and its name are derived from Japanese and each types/subtypes have its own significance. There are two types of candlestick:
Bullish Candle
In this closing is above opening, and colour of the candle is green. Here we don't consider what was the previous closing. This happens because after opening, price went up and closed above opening. High and Low doesn't matter.
Sequence is High >= Open > Close >= Low.
Bearish Candle
In this closing is below opening, and colour of the candle is red. Here we don't consider what was the previous closing. This happens because after opening, price went down and closed below opening. High and Low doesn't matter.
Sequence is High >= Close > Open >= Low.
Both the types of the candle is shown in the image below:
Range of the candle would be a difference of high and low. Candle body is defined as a difference between open and close, as shown in the image above. Anything that is leftover apart from the candle body is known as wick. We have upper wick and lower wick. Real move that candlestick capture is from open to close, and generally this wick is considered as noise in the candlestick.
Remember one thing green and red colour is modern but nowadays trading platform gives option to change the colour of both the candle and users can set as per their need. You can set any colour but make a note of this if you are changing.
This is just about candlestick but there are many subtypes of these bullish and bearish candlesticks. I will share those subtypes of the candlestick that I use frequently and I find it most useful by any beginners.
Bullish Candlestick:
Normal Bullish Candles:
Normal bullish candles are those that include high, low, open, close and high won't be equal to close and low won't be equal to open. It's just like the image that was shown above. Sequence is: High > Close > Open > Low.
This candle means that price opened at a certain price then it made a low and started going up, hit a high then a small pullback and closed below high.
Bullish Marubozu:
Marubozu in Japanese means strength and hence it is the strongest in candlestick. Bullish Marubozu shows that price open at a point and started going up and closed at a higher level. In Bullish Marubozu, theoretically there are no wicks which means Open = Low and Close = High. But practically there could be some variation and we can see small wicks on any side: upside or downside. This is perfectly fine because theory is there to understand the concept and show us how to apply those learning in a practical world. It indicates the strength of the bulls in the price and how they pushed the price higher while closing.
Bullish Reversal Candles:
Reversal candles are my favourite of all because it offers less risk opportunity for a trader to go long or short in that particular stock or index. Being a contrarian trader, I rely on reversal candles the most. But how to trade based on this will be covered in the next blog.
Reversal candle that is widely used here is known as Hammer.
Colour of the candle doesn't matter it can be red or green. Hammer candle signifies that price opened at a certain level then went down seen good demand in the price which pushed the price higher and then price closed near high/open. Theoretically Open/Close = High. But again practically there can be a very small wick above high. Hammer candle has a long wick on the downside and it is fixed. So a candle qualifies for a hammer if:
Lower wick is atleast twice of the body (difference between open and close).
There is small wick above high. Length of that wick should be maximum equal to the length of the body.
Body of the candle should be incline towards upside.
Prior to hammer candle there should be a decent downtrend in price.
Formation and Place at which the hammer is formed is very important while identifying trades. After hammer formation, it is expected that the price will move up.
High of the hammer is important. If it breaks then price is expected to go up after a downtrend.
Bearish Candlestick:
Normal Bearish Candles
Normal bearish candles are those that include high, low, open, close and high won't be equal to close and low won't be equal to open. It's just like the image that was shown above. Sequence is: High > Open > Close > Low.
This candle means that price opened at a certain price then it made a high and started going down, hit a low then a small pullback and closed above low.
Bearish Marubozu:
Bearish Marubozu shows that price open at a point and started going down and closed at a lower level. In Bearish Marubozu, theoretically there are no wicks which means Open = High and Close = Low. It indicates the strength of the bears in the price and how they pushed the price lower while closing.
Bearish Reversal Candles
It is most popularly known as the shooting star because of the candle formation.
Colour of the candle doesn't matter it can be red or green. Shooting star candle signifies that price opened at a certain level then went up seen good supply in the price which pushed the price lower and then price closed near low/open. Theoretically Open/Close = Low. But again practically there can be a very small wick below low. Shooting star candle has a long wick on the upside and it is fixed. So a candle qualifies for a shooting star if:
Upper wick is atleast twice of the body (difference between open and close).
There is small wick below low. Length of that wick should be maximum equal to the length of the body.
Body of the candle should be inclined towards downside
Prior to shooting star candle there should be a decent uptrend in price.
Formation and Place at which the shooting star is formed is very important while identifying trades. After shooting star formation, it is expected that the price will move down.
Low of the shooting star is important. If it breaks then price is expected to go down after an uptrend.
Indecisive Candlestick:
Indecisive candlesticks are popularly known as Doji.
Colour of the candle doesn't matter, it can be red or green. Since it is indecisive which means market is confused which side to move. Interpretation of the Doji is: Price opened a certain price then it went up and down and finally it closed at the same price near open. Theoretically Open = Close but practically such situation occurs very rarely.
So a candle qualifies for a doji if:
Upper wick is almost equal to lower wick.
Body of the candle should be inclined towards centre
Prior to doji candle there should be a decent uptrend or downtrend in price.
High and low of a doji is very important. If price breaks above high, then it is expected that the price will move higher and if it breaks low, then it is expected that price will move lower.
If I want to priortize these candlesticks based on the strength, then it would be:
Marubozu > Normal Candles > Reversal Candle > Doji.
I know many of the friends would be interested to learn more about this. But because of the constraints I will have to stop this blog here with the basics. Nobody is stopping you to learn more about this and you all can refer to the Zerodha Varsity Module on Technical Analsis. It's one of the best source for any trader that too for free and my foundation for technical analysis was built because of this. Link: https://zerodha.com/varsity/module/technical-analysis/
Feel free to reachout to me for any doubts or queries on Twitter, Whatsapp and LinkedIn. Also, you can post your it on in the comment section below this blog.
Also remember these are my rules that I follow while doing analysis and you have full right to disagree with this. In that case I will be more than happy if you create your rules, see how it works on the chart and share with all of us so that I can also learn from you.
If there is something that I can improve upon, then please suggest that too so that I can create true value in this Technical Analysis Series.
Thank You Readers for giving your precious time in reading this blog. Like and Share with others too, so that I will know how many readers are interested in this technical analysis series and it will motivate us to present more informative blogs in the future.
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