The Ultimate Guide To Candlestick Patterns

From an academic point of view, a stock market values companies based on the supply and demand for shares in the company.Investors will bid up (or down) the price of shares in the company based on the financial performance of the firm as shares change hands.

There is a third variable at play though.In the 1700’s a Japanese rice merchant by the name of Munehisa Homma detected a link between the supply and demand, the emotions of traders, and the price of rice.Beyond making Homma a wealthy man from trading rice, discovering this link lead to Homma becoming the father of candle stick charts.

What Is A Candle Stick?

Simply put, a Candle Stick shows the relation between the high price, low price, opening price, and closing price of a stock over a set period.It gets the name from the shape of the arrangement.

The size of the Candlestick is based on the variance in price of the security.The larger the price variance of the security, the larger the Candlestick.Similarly, the wick (the difference between the high price and low price) can be longer or shorter based on the price variance over the time period.The wick can be longer than, or exactly the length of the body of the Candlestick, but not any shorter.To increase visual cues, the body of the candle is colour coded.An open that’s higher than the close (or decreasing candlestick) has the body of the candle filled in red or black.Conversely, a close that’s above the open (or increasing candlestick) has the body of the candle filled in green or left hollow.

How Does This Help Us Predict Investment Performance?

By looking for patterns in candlesticks, we can get a sense of future performance.There are simple patterns, and more complex ones.Let’s start with the simple patterns.

Simple Patterns

Big Black and Big White

A big black or big white candle has a long body, with small wicks.It means that there was a big difference between the open and closing prices, but the high and low prices for the day weren’t much over or under the opening and closing.A big black candle is considered a bearish signal.A big white candle is considered a bullish signal.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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