Candlestick charts simple explanation

Candlestick chart simple explanation with malayalam video

When you look at a stock chart, those lines going up and down show where the price closed each day. Simple right?

Candlestick charts add some color and boxes to reveal more details about the trading each day.

Each candlestick has a thick body and two thin wicks above and below.

When prices CLOSED higher than they opened, candles are green or white. This means buyers won buying battles that day!

When prices CLOSED lower than they opened, candles are red or black. Sellers came out swinging and pushed prices downward by the day end.

The wicks show the trading range. Where did prices peak and bottom out intraday before closing? This quickly shows whether bulls or bears were in charge overall.

Reading candlesticks tells the story behind daily price action - who dominated and won each round? Over time you spot patterns signaling if more upsides or declines may come next.

Different types of charts

Technical analysis utilizes various types of stock charts to analyze and forecast future price movements. Some key chart types are line charts, bar charts, candlestick charts and point & figure charts. Each type highlights certain data and patterns not viewable on other chart formats.

Line charts

Line charts connect a series of data points over a time scale represented along the horizontal x-axis and price scale on the vertical y-axis. Simple yet insightful, they effortlessly indicate key stock trends including rises, dips, new highs and lows. Bar charts provide additional refinement by projecting trading volume through the height of vertical bars with closing price marked by a short horizontal tick. The width and length of bars conveys volatility.

Bar charts

Bar charts are one of the most common types of charts used in technical analysis of stocks. They display a vertical bar to represent the price range between the opening and closing price for each trading period (often a day). The high and low for the period are also visually marked on the vertical bar.

Bar charts provide a simple visual representation of the price action - whether the closing price is higher or lower than the opening price. A rising bar indicates the price closed higher than it opened (a bullish sign). A falling bar shows that it closed lower than the opening price (a bearish sign). The length of the vertical bar indicates the trading range for that day.

Long vertical bars demonstrate higher volatility and wide price fluctuations within a period. Short vertical bars reflect less volatility. Volume traded can also be visualized as horizontal bars at the bottom of bar charts. Comparing volume bars with price bars conveys the strength or market conviction behind price trends.

Candlestick charts

Candlestick charts originated from 18th century Japanese rice traders to visualize shifting market emotions. Modern candlestick charting further aids predictive analysis through color-coded candlesticks that encapsulate trading sessions' open, high, low and closing prices in compact form. The 'real body' between open and close prices shows the session's price range while 'wicks' or 'shadows' above and below indicate session highs and lows.

Point and figure charts

Point and figure charts simplify price action as a series of stacked Xs and Os where X represents upward price movement while O charts downward trajectory. Reversal signals help spot trend changes. Efficacy of technical analysis depends greatly on the chartist’s interpretation skills.

What is candlestick chart 

A candlestick chart is a style of financial chart used in technical analysis of stock and forex markets to visualize price movements over time. Unlike line or bar charts which just connect a series of closing prices, candlestick charts provide a wider perspective into the relationship between opening and closing prices for a specified timeframe.

Each candlestick on the chart represents the price action for a set period and encapsulates within it the open, high, low and close prices for that period. It resembles the shape of a candle with a wide mid-section and wicks on both ends - hence the name candlestick.

Candlestick chart

The body or mid-section of the candlestick shows the range between the opening price and closing price. If the asset closed higher than it opened, the body is colored green or white indicating bullishness. If it closed lower, the body is red or black indicating bearishness.

The thin lines above and below the body represent the high/low range and are called shadows or wicks. Upper shadows show the session high while lower shadows display the session low. Candlestick charts help gauge how bullish or bearish the asset was during a specific timeframe. Reversal patterns form when sentiment flips from bullish to bearish or vice versa. These patterns are used to predict potential trend changes.

The visual simplicity of candlesticks allows quicker interpretation of price action and trader sentiment than other types of financial charts. Candlestick patterns form the basis of many technical trading strategies.

How a candle is formed in candlestick charts

In candlestick charting, each candle represents the price action for a specific timeframe, usually ranging from 1 minute charts to monthly charts. The components that form the candle are:

  1. Open Price - This is the opening price at the start of the selected timeframe. For a daily candlestick, the open price is the starting price for that trading day.

  2. Close Price - The closing price at the end of the trading timeframe forms the close. So for a 15-min candlestick, the close will be the price after 15 minutes of trading.

  3. High Price - The highest traded price over the candle's timeframe is marked as the high.

  4. Low Price - The lowest traded price during the same timeframe locates the low.

Now a candlestick forms based on the relationship between the open and close prices:

  1. If Close > Open - This shows prices rose over the session. The candle body is colored green or white indicating buying pressure and bullishness.

  2. If Close < Open - This indicates the price fell over the timeframe. The candle body color turns red or black denoting selling momentum and bearishness.

The area between the open and close forms the 'real body' of the candle. The high and low prices represent the 'shadows' or 'wicks'.

So a candle's shape visually conveys the tussle between optimists trying to push prices up and pessimists trying to drive prices down during a specific period. Analyzing candle patterns reveals changing market psychology and aids trading decisions.

What is candlestick pattern

A candlestick pattern is a graphical formation made up of one or more candlesticks on a chart which indicates a reversal or continuation of trend. These patterns derive their names from military signs and terms used in ancient Japanese rice trading. 

There are simple single or dual candle patterns like 'Hammer', 'Shooting Star', 'Bullish/Bearish Engulfing' and more complex multi-candle patterns like 'Morning/Evening Stars', 'Three White Soldiers', 'Three Black Crows' etc. Each pattern illustrates a shift in supply-demand dynamics and trader sentiment - either from bullish to bearish or the reverse.

These changeovers signify potential opportunities to enter or exit trades. For instance, after a sustained downtrend, a 'Morning Star' pattern hints the bears are losing control and a bullish reversal could emerge. This allows traders to ready long positions. The 'Evening Star' does the opposite after an uptrend - flagging a potential bearish change ahead.

Candlestick patterns derive extra validity when confirmed by trading volumes and other technical indicators. Their defined and visual nature makes identification easy even for amateur traders. Combining patterns occurring across diverse timeframes offers a thorough scope of market psychology. Mastery over candlestick analysis offers a vital edge to any style of trading.

So in summary, candlestick patterns are reversal, continuation or indecision signals formed by the arrangement of one or more candlesticks on a financial chart. They reveal the constant battle between competing market forces during a given period. We will discuss these patterns in detail in another post.

Check out video from our youtube channel Share market Malayalam by Muhammad Riyas,

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