Candlestick patterns are a critical component of any chart analysis strategy. They offer insights into market sentiment and price movements that can lead to potentially profitable trading opportunities. In this article, we will review the key components of candlesticks and their formation, as well as some basic trading principles that can help you get the most out of them.
Four pieces of price data, gathered through the course of one day’s trading, make up a candlestick: the open, close, high and low prices. The color of the candle’s real body, which is the gap between the opening and closing prices, can be white or black and the long lines sticking out of either end of the candle — called the wicks — indicate the range that the price travelled during that day.
Green or white candles are known as bullish and indicate an upward market trend, while red or black candles are bearish and represent a downward market trend. Candlesticks with a long upper shadow and short lower shadow show that buyers dominated during the session, pushing prices higher, while sellers ultimately forced prices down from their highs, resulting in the short lower shadow.
The most effective candlestick patterns tend to form at key support and resistance levels, where the forces of supply and demand are most pronounced. A hammer pattern at a key support level, for example, could signal that a price reversal is in the works. However, before you start using candlestick patterns in your trading, it’s important to understand how they fit into your overall chart analysis.