Candlestick Charts: Price Prediction Made Easier
Candlestick charts go back to the 18th century and point out the correlation between the change in value and traders’ emotions. The emotion is reflected in the size of the price moves colored either green or red. Such a chart serves as a handy trading tool that can help predict market behavior based on regular patterns to open the right position.
Candlestick elements
A daily candlestick displays the open and close price, as well as its high and low. Its wide part is called the “real body”, which shows the difference between the value at the beginning and the end of the day. If empty, it signifies the closing price is higher than the opening one.
The colors are optional and can be changed; for instance, red or black are often used for a down candle, while green and white are widely preferred for an up candle.
Candlestick vs. Bar Charts
The shadows, or wicks, are the part located above and below the real body. They show the highest and lowest price values for the day.
A short upper wick for the up candle means the closing price is near the highest, while the relationship between all the 4 indicators (open, close, low, and high) makes up the look of the candlestick. Real bodies can be either long or short and differ in color, whereas shadows differ in size, being long or short.
Candlestick charts show the same info as bars, the difference is the way of representation. A candlestick chart is more illustrative, as its colors and the width of real bodies emphasize the difference between the price ratio during the day.
Most Used Candlestick Patterns
Price movements often follow the predetermined patterns that can be used by traders to make a price forecast. Patterns fall into two groups, bullish and bearish, which indicate whether the price is going to rise or fall. However, it is worth remembering that patterns are not to be blindly followed, as they are not 100% reliable.
Bearish engulfing pattern
A bearish engulfing pattern shows a negative price trend, meaning that there are more sell orders than buy ones. In such a case, a long red body engulfs a small green one, signaling that sellers prevail, and the asset value will keep on dropping.
Bullish Engulfing Pattern
The situation when buyers outnumber sellers is called a bullish engulfing pattern. Here, a long green real body engulfs a small red one, as bulls outpace bears resulting in the positive price change.
Bearish Evening Star
An evening star depends on the last candle in the pattern opened below the small body on the previous day. The last candle closes deep into the real body of the candle taking place two days earlier. Such a pattern demonstrates that the number of sell orders is growing, which could lead to a decline in price.
Bearish Harami
When a small red real body is found within the previous day’s real body, it means buyers are stalling. The pattern is known as a bearish harami: if the price continues to go down, it’s the sign of a downtrend, although the further growth of the up candle means the opposite trend will take place.
Bullish Harami
The negative trend with a small green real body inside the large red real body of the day before denotes a chance for a change. Bullish Harami followed by another up day, indicates the approach of the price rise.
Bearish Harami Cross
When a doji — the situation where the candlestick has almost the same open and close — goes after the up candle during the positive trends, we are dealing with a bearish harami cross. The doji is completely inside the real body of the previous session, and the consequences equal those of the bearish harami.
Bullish Harami Cross
If the negative trend takes place and the candle followed by doji is a down one, that’s a bullish harami. On this occasion, the doji is inside the previous session’s real body, and the result is the same as with the bullish harami.
Bullish Rising Three
The pattern begins with a long white candle and a few sessions. Hence, small real bodies start making the price drop, although the asset value remains within the long white day. The two last days of the pattern are long white days as well, and the bulls get ready for another move up.
Bearish Falling Three
With such a pattern, three small real bodies move the price up after a down day, but the range remains within the first down day. The fifth day is marked by another price decline, meaning the sellers are back in charge, ready to move the price further down.
Summary
Traders’ emotions have a direct influence on the changes with the asset value. Candlesticks are indispensable when trying to figure out which direction the price is about to take. Get the hang of candlestick charts and feel more confident about placing orders!
