What is a Candlestick?

Candlesticks are one of the most powerful tools in a technical trader’s arsenal. As introduced in our earlier discussion on chart types, candlestick charts are highly preferred for their ability to offer immediate insights into market sentiment and potential trade opportunities. Their visual appeal and informative nature make them especially useful for analysing price action and making well-timed trading decisions. 

Introduction to Candlesticks 

Candlestick charts are extensively used by traders due to the clarity they bring in interpreting market movement. Unlike basic line charts, candlestick charts display individual price candles, helping traders decode patterns that may suggest potential price direction. Each candle tells a story through its colour, size, and structure, enabling traders to act on single-candle or group-candle formations. 

What Do Candlestick Charts Reveal? 

• They showcase Open, High, Low, and Close (OHLC) for a particular time frame 

• Candles represent the price action using colour (often green for bullish, red for bearish) and body size 

• Historically, charts used black and white candles before color-coded platforms existed 

• A hollow (white) candle indicates upward price movement, while a filled (black) candle indicates downward movement 

• Platforms like m.Stock, use vibrant colour schemes to distinguish market sentiment 

• Wicks or shadows above and below the body represent price extremes during that session 

Anatomy of a Candle: Understanding Candle Body Language 

The Body 

The length of the body reveals the strength of price movement. A long body suggests decisive price action, while a shorter body indicates minimal movement during the period. 

The Wick 

• A long wick and short/no body near the highs, points to strong bullish sentiment 

• A long red candle with minimal wicks suggests bearish dominance 

• If a candle lacks an upper wick, it’s called a shaven head 

• A candle without a lower wick is called a shaven bottom 

Proportion and Position 

• A long wick with a small body near the high signals buying pressure (bullish control) 

• A long wick with a body near the low implies selling pressure (bearish control) 

• When wicks appear on both sides of a small body, the market has experienced volatility and indecision 

The Japanese Perspective: Emotions Behind Candles 

Japanese traders have long considered open and close levels as the most emotionally charged points in a trading session. Their insights offer a deeper interpretation of candlestick behaviour: 

• Morning Attack: The market opens with a surge fuelled by overnight news and speculation 

• Night Attack: Closing hours often see heavy activity as positions are squared off or adjusted due to margin calls 

These time frames are critical for traders. Using platforms like m.Stock will help gauge the emotional pulse of the market. 

Candlesticks as Emotional Barometers 

Candlesticks don't just show the price,  they reflect the emotions of the market. Different patterns symbolise various states of trader sentiment: 

• Hanging Man patter signals market anxiety or potential reversal 

• Morning Star candle pattern suggests recovery and a new upward trend 

• Evening Star indicates potential downtrend or market exhaustion 

• Marubozu is a candle with no wicks, signalling strong momentum in one direction 

• Doji candlestick patter shows indecision. The open and close are nearly the same, indicating a balance between buyers and sellers 

Types of Candlestick Patterns 

1. Reversal Patterns 

These signal a potential change in market direction and can be formed by one or more candles. 

Single-candle reversal patterns: 

• Hanging Man 

• Hammer 

• Spinning Tops 

• Doji 

• Morning Star 

• Evening Star 

• Marubozu 

Multi-candle reversal patterns: 

• Engulfing 

• Piercing Line 

• Dark Cloud Cover 

2. Continuation Patterns 

These suggest the trend is likely to continue and usually require multiple candles to form.  

Examples include: 

• Three White Soldiers 

• Three Black Crows 

• Tweezers 

More in-depth discussion on these patterns will follow in upcoming lessons. 

Points to Remember 

• Candlestick charts offer deep insights into market psychology when analyzed correctly 

• Learning the structure and meaning behind each candle can enhance your technical analysis skills