What is a Candlestick Chart?

A candlestick, also known as a Japanese candlestick, is a type of chart that reflects price trends. Its feature lies in summarizing and organizing the price movement of an asset over a period, using different colors and shapes to convey price information and market sentiment, making it easy for investors to analyze. It is widely used for technical analysis in stocks, futures, precious metals, digital currencies, etc., known as candlestick analysis.
It is said that the candlestick chart was invented by a rice trader named Homma Munenori during Japan’s Edo period to record daily rice market trends and analyze the futures market.

Principles of Candlestick Formation

A candlestick chart mainly consists of three parts: the body, the shadow, and the color.

• Body: It can be solid or hollow, indicating the price fluctuations between the opening price and closing price. A bullish candlestick closes at a higher price, while a bearish candlestick closes at a lower price.
• Shadow: Also known as the “wick,” the shadow extends from the body of the candlestick and marks the highest and lowest prices during that time period.
• Color: Indicates the direction of price movement during that time period. Generally, green represents a price increase, while red represents a price decrease.
  A candlestick chart is drawn by recording four price data points over a certain time period, with each candlestick corresponding to a specific time interval, such as 1 minute, 1 hour, 1 day, etc.:
• Opening Price: The first trading price at the beginning of the time period.
• Closing Price: The last trading price at the end of the time period.
• Highest Price: The highest trading price during the time period.
• Lowest Price: The lowest trading price during the time period.
  

Classic Candlestick Patterns

Bullish/Bearish Engulfing Pattern

The engulfing pattern consists of two candles.

• Bullish Engulfing Pattern: A small bearish candle is completely covered by a larger bullish candle. The body and shadow of the bullish candle entirely engulf the bearish candle. This pattern indicates that the market faced selling pressure the previous trading day (shown by the bearish candle), but on the new trading day, the buyers completely took over, reversing the previous downtrend.
• Bearish Engulfing Pattern: This consists of a small bullish candle followed by a large bearish candle, which completely engulfs the former. This indicates strong selling pressure in the market.
  

Hammer and Hanging Man

The hammer and hanging man are single-candle reversal patterns, referred to in English as pin bars.

• Bullish Pin Bar: Typically called a hammer, it is a bullish reversal signal characterized by a small body and a long lower shadow. This pattern indicates that the sellers initially dominated and pushed the price down, but as trading neared its close, buying pressure increased, pushing the price above the opening price.
• Bearish Pin Bar: Often referred to as a hanging man, it is a bearish reversal pattern characterized by a small body and a long lower shadow. It shows that sellers were initially in control, but buyers briefly pushed the price up. However, sellers quickly regained control, driving the price below the opening price. When the hanging man appears at a high point in an uptrend, traders may look for suitable selling opportunities.
  

Morning Star/Evening Star Pattern

The morning star and evening star consist of three candles, starting with a large body, followed by a doji, and then a large body of the opposite color.

• Morning Star Pattern: A bullish reversal pattern that usually indicates a price increase. It starts with a long bearish candle, followed by a small candle, and ends with a long bullish candle. The middle small candle can be a doji or spinning top.
• Evening Star: A bearish reversal pattern that usually indicates a price decrease. This pattern also consists of three candles: a long bullish candle, followed by a small candle, and a long bearish candle.
  

Inside Bar

A bullish inside bar consists of a longer bearish candle followed by a shorter bullish doji that is completely within the body of the bearish candle. This indicates a slowing down of the bearish trend or an impending end.
A bearish inside bar consists of a longer bullish candle followed by a shorter bearish doji that is completely within the body of the bullish candle. This pattern usually appears at the end of an uptrend, indicating a weakening of buying pressure.

Summary

Essentially, candlestick charts are the visual language of the financial world. They are like brush strokes on a canvas, each telling a unique story about market sentiment and price behavior. These patterns have stood the test of time, providing a unique perspective on market data. Each candlestick chart skillfully compresses information from multiple time frames into a single, expressive price bar, making it a trusted tool in modern trading.