1. White candlestick – White candlesticks or hollow candlesticks signal uptrend movement. These occur in different lengths; the longer the body, the more significant the price increase.
2. Black candlestick – Black candlesticks or filled candlesticks signal downtrend movement. These occur in different lengths; the longer the body, the more significant the price decrease.
3. Long lower shadow – Long lower shadow gives a bullish signal. The lower wick must be at least the body’s size; the longer the lower wick, the more reliable the signal.
4. Long upper shadow – Long upper shadow gives a bearish signal. The upper wick must be at least the body’s size; the longer the upper wick, the more reliable the signal.
5. Hammer – A hammer shows a bullish pattern during a downtrend. The hammer has long lower wick and small or no body. Shaven head hammer shows a bullish pattern during a downtrend & a bearish pattern during an uptrend since it has no upper wick. The Hanging man hammer candlestick shows bearish pattern during an uptrend. It has long lower wick, small or no body; wick has the multiple length of the body.
6. Inverted hammer – Inverted hammer signals bottom reversal; however confirmation must be obtained from next trade. It may be either a white or black body. Shaven bottom inverted hammer signals bottom reversal, however confirmation must be obtained from next trade. It has no lower wick. Shooting star inverted hammer shows a bearish pattern during an uptrend. It has small body, long upper wick, small or no lower wick.
7. Spinning top white – Spinning top white gives a neutral pattern. It gives a normal view until seen with respect to the other candlestick patterns
8. Spinning top black – Similar to spinning top white pattern and gives neutral pattern but in black candlestick. Again becomes meaningful when sees in combination with other candlestick patterns
9. Doji – Doji is a neutral pattern with no body and only shadows, meaningful in combination with other candlestick patterns
10. Long legged doji – This is a type of DOJI but have long shadows. It signals a top reversal
11. Dragonfly doji – As in a normal Doji, there is no body and a Dragonfly Doji signals trend reversal since it has no upper wick and long lower wick.
12. Gravestone doji – Opposite to Dragonfly doji and signals trend reversal. It has no lower wick and long upper wick
13. Marubozu white – Marubozu denotes dominant bullish trades and continued bullish trend. It has no upper or no lower wick.
14. Marubozu black – Marubozu black denotes dominant bearish trades and continued bearish trend. It has no upper or no lower wick.

Related posts:

1. Candlestick Stock Chart Analysis – Introduction
2. MACD technical analysis
3. Technical analysis of stocks

Candlestick stock analysis technique has become very popular among the traders and analysts. Since this is just a short term analysis tool it covers the stock for only 8 – 10 trading sessions. Candlestick charts are often very complex and pretty difficult to understand. We will have a series of articles on candlestick techniques and we will try to cover as much as we can about this technique.

Components of a candlestick:

Candlestick looks somewhat similar to a bar in bar chart but that’s where the similarity ends. Sometimes the people who study bar charts get confused when they look at a candlestick chart since candlesticks look like bars but the charted in a different way. A candlestick has 3 parts; there is a wide part which is called real body of the candlestick and then there are two lines on either side of the real body which are called shadows. The real body represents the range between the open and close of that day’s trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the opposite: the close was higher than the open. The shadows are sometimes called the wicks of the candle. The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. Real bodies can be either long or short and either black or white. Shadows can also be either long or short.

Candlestick components

How do candle charts compare with bar charting?

The biggest difference between a candlestick chart and a bar chart is that a candle stick chart give information about the opening price as well as closing price of a stock on the same trading day while the bar charts only charts the closing prices between yesterday and today. The reason is that Americans put more emphasis on the closing price of a stock while Japanese think it is important to consider both opening as well as closing price on the same day.

If you see a candlestick chart and a bar chart of a same stock for the same period, you will notice the vast amount of difference in information between these two charts.

Candlestick vs Bar chart compare

In following articles we would cover about:

• Candlestick chart patterns
• Candlestick pattern analysis
• Candlestick support and resistance

Related posts:

1. Candlestick Stock Analysis – Patterns
2. Technical analysis of stocks
3. Swing Trading – Introduction to Swing Trading Basics

Unlike fundamental analysis of stocks, technical analysis doesn’t consider value, growth, income and management’s effectiveness. It relies purely on numbers and charts. Technical analysis uses a wide variety of charts that show price over time. This usually helps to estimate what the future price of a stock may be after studying the past trends as they rely on the principle that ‘history repeats itself’.

Assumptions on which technical analysis work

There are 3 assumptions on which technical analysis of stocks is done. These are:

1. The market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.

Types of charts used in stock technical analysis

The various types of charts being used in technical analysis are:

OHLC (Open high low close charts) – These charts are bar charts in which the high and low price movement of a stock is charted vertically and open and close are charted horizontally. This chart is used to graph outliners and ranges.

Candlestick charts – This chart is similar to open high low close charts but open and close are filled. Often Black or Red candles represent a close lower than the open. And White, Green or Blue candles represent a close higher than the open.

Line charts – These are the simplest of charts which are charted on close price of a stock over a period of time. Analysts believe that the closing price is the most important price of a security.

Charts are one of the most fundamental aspects of technical analysis. It is important that you clearly understand what is being shown on a chart and the information that it provides. Let’s take a look at how are trends noticed in charts. We are only covering the topics on analyzing the stock trends in this article. We would have a separate article discussing technical analysis of stock trends to go deep into this topic.

1. Head and shoulders
2. Cup and handle
3. Double tops and bottoms
4. Triangles
5. Flag and pennant
6. Wedge
7. Gaps
8. Triple tops and bottoms
9. Rounding bottom

These are the most popularly used trends and chart patterns which would help you understand price movement of stock.

Price-based indicators

Price based indicators are very important and are derived from these charts and historical prices. These indicators are generally shown below or above the main price chart.

Accumulation/distribution index—based on the close within the day’s range

Advance decline line — a popular indicator of market breadth

Average Directional Index — a widely used indicator of trend strength

Commodity Channel Index – identifies cyclical trends

MACD – moving average convergence/divergence

Parabolic SAR – Wilder’s trailing stop based on prices tending to stay within a parabolic curve during a strong trend

Relative Strength Index (RSI) – oscillator showing price strength

Rahul Mohindar Oscillator – a trend identifying indicator

Stochastic oscillator, close position within recent trading range

Trix – an oscillator showing the slope of a triple-smoothed exponential moving average, developed in the 1980s by Jack Hutson

Similar to price based indicators there are a few volume based indicators as well:

Money Flow – the amount of stock traded on days the price went up

On-balance volume – the momentum of buying and selling stocks

PAC charts – two-dimensional method for charting volume by price level

Related posts:

1. Technical analysis of stock trends – Volume, Aroon and Fibonacci
2. MACD technical analysis
3. Candlestick Stock Chart Analysis – Introduction