Day 89 The Candlestick chart

 The Candlestick chart

The Japanese Candlestick Chart, or simply the Candle Chart is the most popular trend analysis instrument used in the stock market. It has the name due to its candle pattern. Where the rectangular shape in the middle is called the real body plus the upper and lower tails named shadow. There are two types of candles, the bullish candle and bearish candle. The bullish candle appears when the closing price is above the opening price. In the contrary, the bearish candle represents the closing price is below the opening price. Generally, the bullish candlesticks are green or white candles, whereas bearish candlesticks are red or black. (The Chinese stock market has the opposite color structure) By evaluating the shape of the candles in a period, we would be able to predict the moving patterns for the specific stock in the following period. Since it is a complicated subject, which require immense amount of explanation, we would only discuss the four easiest patterns of possible reversal in trend.

The first two patterns are the bullish/bearish engulfing reversal. Literally, it occurs when the candle of current period engulfs the previous candlestick. It indicates the possible trend of reversal, upwards with the bullish engulfing and downward with bearish one. In order to explain what happens, we choose the bullish engulfing as our example. Where the bearish engulfing works as the exact opposite conduct. For the bullish engulfing, it must appear in a declining trend. The second candle should open below the first and close at the price above it. Hence virtually, the second candle ‘swallow’ the previous one. The reason behind this trend is the second candle’s real body shows the robust force of the buyers of the share has entered the market. The pursue of the share pushed the closing price even above the opening price of the first candle. In addition, the uptrend will provide confidence for other buyers in the market, and therefore it continues to strengthen the bulling market force.

Another two reversal patterns are the hammer and the shooting star. The hammer has the shape as its name. It has a long lower tail and a short upper shadow. The real body of this hammer candle is narrowed around the highest price, thus the open and close price has subtle difference. It appears in a downtrend, which determines a possible bullish reversal. In fact, financial professionals advocates that the lower tail must be at least two times longer than the body proportion to make a hammer valid. The long lower shadow defines that the buyers pushed the price back to the top from the lowest price. Consequently, the power of bulls shall prevail in the following period. On the other hand, the shooting start is a bearish reversal sign in the market. It has an opposite shape of the hammer and appears in an upward pattern. It indicates the seller (bear) encounters the rising price driven by the buyers back to the opening price. Thereby it might be the sign for the price fall next.

Although these are the basic application of the candlestick chart, it is easy to comprehend and very helpful for starters in stock markets.