Introduction to candlestick chart and patterns
Candlestick charts are one of the oldest charting methods, developed in 18th-century Japan to analyze price movements in the rice market. They have many patterns, helping traders to understand market sentiment through their visualization of price dynamics over a specified period.
CONTENTS:
- What are candles
- Candles vs bars
- Enabling the candles chart
- Settings
- What are candlestick patterns
- Candlestick patterns indicators
What are candles
Today, candlestick charts are widely used in technical analysis along the line and bar charts and is considered one of the most informative tools in the financial industry.
They come in different variations and can give you many insights into asset performance. They have many patterns. Learning them may take your time, but when you know them, this knowledge may help you identify potential trend reversals or continuation.
But first, let's start with the candle's parts.
Each candle consists of two components:
- Body: Represents the range between the open and close prices
- Shadows (a.k.a wicks): Extend from the top and/or bottom of the body. They indicate the high and low prices during the specified timeframe
The color of a candle conveys the price movement within the interval:
- Green candles: The open price is at the lower edge of the body, and the close price is at the upper edge
- Red candles: The open price is at the upper edge of the body, and the close price is at the lower edge
Candles vs bars
Along with bars, candles are one of the crucial chart types almost every trader uses. While both chart types display similar information, each has its own strengths and weaknesses.
Candles
- Very intuitive and visually engaging in displaying open, high, low, and close prices
- May be more suitable for more conservative traders, focused on open and close prices
- Various candlestick patterns may provide extensive information about market sentiment even before you apply drawing tools and start reading indicators
Bars
- Close prices are considered a standard to understand an asset's true price. With bars, it may be harder to quickly grasp multiple close prices on many bars
- Bars display similar price data as candles, so candle patterns may also be applied to bars. But with bars, these patterns are harder to interpret, which can make them less intuitive
Enabling the chart type
Once you are on the Supercharts, open the chart type menu on the upper toolbar, and select "Candles."
Settings
To make the most of the candlestick chart, customize it according to your preferences and needs.
To do this, find the gear "Settings" button on the upper toolbar, and go to the "Symbol" tab.
The first section, Candles, lists settings specific to the chart type:
- Color bars based on previous close: With this setting on, the color of each bar will be determined by whether its close price is higher (green) or lower (red) than the close price of the previous bar, rather than by the bar's own open and close prices
- Body: Change candle bodies' outlook for enhanced visual appearance
- Borders: Change the color of the candles' edges
- Wick: Choose the preferred color of the candles' shadows
What are candlestick patterns
Patterns are similarities in candles appearance, their sequence, or position relative to one another that suggest a particular price movement in the near future.
Candle patterns are forms of chart patterns — the broad terms used to describe patterns that both occur on a chart regardless of a chart type (e.g., line chart, hollow candles, etc.) and candle patterns, which are unique to candlestick charts.
Some patterns can consist of a single candle, while others may include as many as five candles.
They can signal what is likely to happen with the price if the pattern is confirmed. There are three common types of patterns:
- Reversal patterns
- Continuation patterns
- Neutral patterns
The more candles a pattern needs to form, the less often it occurs.
Moreover, some candle patterns can have reversed versions that work identically — just in another direction.
Next, we'll see examples of each. More information on candle patterns can be found in our Knowledge base.
Reversal patterns
Signal potential end of the current trend. If the pattern is confirmed, the asset's price may enter an opposite phase.
One of these is Tweezer Top — Bearish — a two-candle pattern that must appear at the top of the trend. The high of the second candle must be almost equal to the high of the first candle, indicating bull's inability to push the price higher.
Continuation patterns
These indicate that the trend is likely to continue.
Rising Three Method — consists of a bullish candle followed by three bearish candles, bodies of which must stay within the price range of the first candle. These three candles must then be followed by another long bullish candle.
Neutral patterns
These patterns may be the most commonly appearing ones, as there's Doji — a very common single-candle pattern, appearing at any phase of the price movement.
Doji has a small body and nearly identical wicks. It can be both red or green — the color of Doji means nothing.
See yourself how many of them are on the chart.
So let's move to candle patterns indicators and see how these tools can enhance your view of the charts.
Candlestick patterns indicators
To maximize the utility of candlestick charts, you can use candlestick pattern indicators. To do so, go to the upper toolbar and select "Indicators" → "Technicals," choose "Patterns," and scroll down to find Candlestick patterns.
These automated tools detect specific candlesticks and candlestick patterns and provide insights into their potential implications.
However, not all pattern indicators work as they are expected to. Moreover, some of them contradict other indicators and may not align with your strategy.
Keep learning the tradingverse to see the broader context of the market. Apply your knowledge to different trading approaches and find what works for you.
Candles in a nutshell
Candlesticks' main use case is price analysis.
They are considered as a standard in modern trading, as they incorporate both simplicity and comprehensiveness while representing complex financial data.
They come in different variations (e.g., hollow candles, volume candles, etc.), but to use all of them, you may want to study the original ones first.
Candles have many patterns, from simple Dojis to more intricate ones consisting of up to five candles — our automated tools can save your time and help you with navigating the complex financial landscape.
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