Candlestick charts are nothing but visual representations of price movements of stocks for a specified period of time. The credit for finding the candlestick chart pattern mainly goes to Munehisa Homma. Homma was a rice merchant from Sakata in Japan. He traded in the Ojima rice market in Osaka between 1724 and 1803. Some of the early technical analysis tactics were used for tracking the price of rice during the 18th century.
Candlestick charts are mainly used for technical analysis purposes. The candles on the candlestick chart represents information for a specific unit of time. The candles can represent anything from one minute or an hour, or a day, month, or even a year. Some candlesticks may also have lines above and below them, these lines are known as wicks, tails, or even shadows. These lines represent the high and low price ranges for a specified time period. It is important to note that not all candlesticks will have wicks.
The candlestick charts are usually formed with the help of 4 factors namely, Open, Close, High, and Low prices of a financial instrument. If the opening price of a security is more than the closing price of a security then a filled candlestick that is normally red or black is formed. If the closing price is more than the opening price, then normally a hollow or a green candlestick is formed. In simple terms, the color of the candle is important in understanding whether the opening price was higher or lower than the closing price. If the color of the candle is red that indicates that the closing price is higher than the opening price. And if the color of the candle is green then itʹs vice-versa.
Generally, the price action traders mostly rely on candlesticks as they convey a great deal of information about each and every trading period in a simple visual format that is easy to interpret. This allows the traders to learn and compare the behavior of prices across different time periods by just looking at the price action charts.
There are several patterns of candlesticks that are used by traders in carrying out technical analysis such as Doji pattern, Hammer pattern, Inverted Hammer pattern, Marubozu pattern, Shooting Star pattern, Evening Star pattern, Morning Star pattern, Bullish Engulfing pattern, Bearish Engulfing pattern, Three White Soldiers pattern, Three Black Crows pattern, etc. are some of those. Some of these patterns retain their original Japanese names.
Each pattern comes up with its own built-in risk mechanism. Candlesticks can more often be broken down into various single as well as multiple patterns. Thus, Candlestick patterns help traders in developing a complete point of view of the markets.
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