To me candle sticks are a must. A candle stick chart tells alot more information than your typical line or bar chart. Candle sticks trading was developed in the 18th century by Munehisa Homma, Japanese rice trader of financial instruments. Candlesticks are usually composed of the body (black or white)/(red or green)/(filled or unfilled), and an upper and a lower wick. The area between the opening price and the closing price is called the body.
The wick gives you the highest and lowest traded prices of a security during the time. The body illustrates the opening and closing trades. If the security closed higher than it opened, the body is white, green or unfilled depending on your chart, with the opening price at the bottom of the body and the closing price at the top. This basically means that the security moved up during the time presented. If the security closed lower than it opened, the body is black, red or filled, with the opening price at the top and the closing price at the bottom. A candlestick doesn't have to have a wick. A candle without the top wick means that the highest traded price in the given time frame is the closing price. If the candle doesn't have a bottom wick, that means that the lowest trading price is the closing price.
A candle without a top wick can also happen if the opening price is the highest traded price. A candle without a bottom wick can happen if the opening price is the lowest traded price. This can seem a bit complicated at first, but once you get used to it it will become second nature. It's important to know the different candle stick patterns and their implications. But, I don't want you to get too caught up in the patterns. Know the meaning behind each candle stick. Don't get caught too up in the names and the patterns; in real life, the candle sticks may not exactly fit the patterns that I am about to show you. Like all things in life, there's no black or white, there's a spectrum, and I want you to know the meaning behind the candle sticks that I am about to show you.
The hammer candle usually have a small body and a long wick at the bottom. The body can be green or red. The hammer candle means that the security traded down, but the buyers stepped in and were able to recover the losses. The hammer candle usually happens near bottoms and is a bullish sign. The implication is that there are buyers at this price range. Look for large green body candle after the hammer for better entry points.
The Hanging Man
The hanging man candle looks exactly the same as the hammer,but it happens on uptrends at market tops. Like the hammer, the body can be green or red and the body is usually relatively small. The implications of the hanging man is that there is a lot of selling at the price range, but the buyers were able to push it back up temporarily. This is a bearish indicator and look for a follow up of large red body candles for better entry to the short side.
The doji candle means that the buyers and the sellers are equal. The price trades in a tight range and is reflected usually by low volatility. Visually, the body of the candle is small and the wicks are of equal lengths. This is a sign of indecision from the market. Although it doesn't usually say anything on its own about the market direction it can have strong implications at market tops and bottoms. It could mean that on an uptrend, the sellers are stepping in, and on the downtrend, the buyers are stepping in.
Evening star or spinning top candle is the best example of a doji that has a greater meaning than its regular meaning. It happens in an uptrend at market tops and usually after a gap up. It usually have a relatively longer wick than your ordinary doji. It has bearish implications if it happens near tops and bullish implications if it happens near bottoms. Your confirmation of a reversal is a large body candle in the opposite direction . Remember, try to understand the meaning behind the candles. In the case, of a spinning top in an uptrend, it's massive buying that is met by selling of equal proportion. It's bearish because the security have moved up for quite sometime and needs to consolidate.
A shooting star candle stick has a long wick on top of its body. This candle means that there was a lot of buying, but it was met with stronger selling which pushed the price all the way back down. This candle stick has very bearish implications. The pattern is more bullish if it happens at market bottoms in a downtrend.
Haramis are when a smaller body candles occur inside a long body candle in the opposite direction. In a downtrend, if a small green candle occurs after a large red candle, it's called a bullish harami. In an uptrend, if a small red candle occurs after a large green candle, it's called a bearish harami. Don't confuse the harami candles with the engulfing candles. The sequence what makes the difference and it can have very different implications.
Bullish Engulfing Candle
A bullish engulfing candle is when a large green body candle follows a smaller red candle, completely engulfing the smaller candle in its body. It doesn't always have to be on an downtrend, but its implications are usually more bullish in a downtrend.
Bearish Engulfing Candle
A bearish engulfing candle is when a large red body candle follows a smaller green candle and totally engulfs the smaller candle in its body. It doesn't always have to be on an uptrend, but its implications are usually more bullish in a uptrend. For more on candle sticks, click here.