When it comes to trading, candlesticks can be a helpful tool in predicting future price movements. But what exactly are candlesticks, and how do they work?
Candlesticks are graphical representations of price movements over time. They consist of a “body” (the real body) and “shadows” (the wicks), which show the high and low prices for the period being represented. Professional traders like Saxo Bank often use candlesticks to help with trading decisions.
Components of a candlestick
The open, high, low, and close prices for the day are shown in a daily candlestick, similar to a bar chart.
The candlestick body
The body of the candlestick is its widest part. This real body indicates the price range between the opening and closing of that day’s trading. It indicates whether or not the close was lower than the open when the actual body is filled in or blackened. If the body is empty, the close is more significant than the open.
The bodies of candlesticks can be either bullish or bearish. A bullish candlestick has a closed higher than the open, while a bearish candlestick has a closed lower than the open. The colour of the body is not essential, but green is typically used to represent a bullish candlestick and red is used to represent a bearish candlestick.
The shadows
The shadows of candlesticks show the high and low prices for the period being represented. The upper shadow represents the high price, whereas the lower shadow represents the low price.
Candlestick patterns, in general
Candlestick formations are caused by price fluctuations up and down. While these price changes may appear chaotic, they frequently form patterns that traders use for analysis or trading purposes.
A series of price changes characterize a trend. Patterns are separated into bullish and bearish categories. The price is expected to rise if the pattern is bullish, and it is expected to fall if the pattern is bearish. Candlestick patterns do not guarantee success; they represent tendencies in price movement, not certainties.
Candlestick patterns exist in a variety of forms. Here’s a list of some of the most popular ones to get you started.
Basic patterns
Common patterns include the bullish and bearish engulfing patterns, bearish evening star, and bullish and bearish harami.
Bearish Engulfing Pattern
A bearish engulfing pattern emerges in an upward trend when sellers exceed buyers. This event is represented by a long red body covering a tiny green body, representing a long red body engulfing a short green body. The pattern suggests that sellers have reclaimed control and that the price might fall further.
Bullish Engulfing Pattern
The market is in an engulfing pattern on the upswing when buyers outpace sellers. The chart reflects this by a long green body devouring a tiny red body. With bulls regaining some power, the price may rise further.
Bearish Evening Star
A topping pattern is a design with an evening star at the end. The last candle identifies it in the pattern, which begins below the previous day’s small body and ends above it. You may use red or green to make up the tiny body. The last candle’s body runs deep into the candle’s real body two days before. The pattern consists of a temporary halt by purchasers and sellers regaining control. More selling may be on the way.
Bearish Harami
A bearish harami is a tiny body (red) contained within the previous day’s body. This isn’t a pattern that you should act on, but it could be one to watch. The pattern suggests that the purchasers are undecided. If the price continues to rise following this pattern, everything may be OK with the uptrend, but a down candle indicates a subsequent decline.
Bullish Harami
The opposite of the upside-down bearish harami is the bullish harami. A downward trend is in effect, and a little body (green) forms within an enormous body (red) from the previous day. A large swing in the price of Bitcoin, for example, would mean that the technician has discovered a change. It implies that the trend is pausing.
Candlesticks can be a helpful tool, but it’s important to remember that they are just one piece of the puzzle. Other elements, such as support and resistance levels, moving averages, and technical indicators, should also be considered while making trading decisions
