Understanding Candlestick Formations
Certain data is require to create a candlestick chart consisting of the open, high, low and close from each time-frame you will to display. Depending on what kind of trader or investor you are this could be as low as a 1 minute chart or as high as a yearly chart.
The hollow or filled portion of each candlestick is referred to as the the body or the real body. The long thin lines above and below the body represent the high/low range and are known as wicks, tails or shadows. The high is marked by the top of the upper wick and the low by the bottom of the lower wick. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body representing the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.
In comparison to other charts such as the traditional bar charts, many traders and investors alike find that candlestick charts are much more visually pleasing and therefore easier to interpret. Each candlestick provides traders with a clear view of what happened within the price action of anytime frame and instantly compare each level within the open,close high and low which is considered to be vital information.
As for the candles themselves Hollow candlesticks, where the close is higher than the open indicate that buying pressure is kicking in whereas filled candles where the close is lower than the open indicate selling pressure.
Long Versus Short Bodies
In general the longer the body of the candlestick is the more intense the buying or selling action is within the time-frame whereas shorter candles tend to indicate smaller price movements and can also represent consolidation.
Long white candlesticks indicate increased buying pressure.
The longer the white candlestick is, the further the close is above the open. This indicates that prices rallied significantly from open to close and buyers were aggressive. While long white candlesticks may seem bullish, much depends on their position within the broader technical picture. After extended declines, long white candlesticks can mark a potential turning point the the underlying asset bottoms out at a level of support. On the other hand if shares have put in a signfigant move to the upside we might want to holdout before entering a long position or even watch for a short.
Long black candlesticks indicate increased selling pressure.
The longer the black candlestick is, the further the close is below the open. This indicates that prices declined significantly from the open as more sellers started to kick in. After a long advance, a long black candlestick can foreshadow a turning point or mark a future resistance level. After a long decline a long black candlestick can indicate panic or capitulation.
Even more potent long candlesticks are the Marubozu brothers, Black and White. Marubozu do not have upper or lower wick and the high and low are represented by the open or close. A White Marubozu forms when the open equals the low and the close equals the high. This indicates that buyers controlled the price action from the first trade to the last trade. Black Marubozu form when the open equals the high and the close equals the low. This indicates that sellers controlled the price action from the first trade to the last trade.
Long Versus Short Wicks
The upper and lower wicks on candlesticks can provide valuable information about the trading session. Upper wicks represent the session high and lower wicks the session low. Candlesticks with short wicks indicate that most of the trading action occurred near the open and close. Candlesticks with long wicks show that prices extended well above or below the open and close.
Candlesticks with a long upper wick and short lower wick indicate that the bulls dominated, and pushed prices higher. However, sellers later forced prices down from their highs, and the weak close created a long upper wick. On the other hand, candlesticks with long lower wicks and short upper wicks indicate that the bears dominated during the session and drove prices lower. However, buyers later resurfaced to bid prices higher by the end of the session and the strong close created a long lower shadow.
Candlesticks with a long upper wick, long lower wick and small real body are called spinning tops. One long wick represents a reversal of sorts; spinning tops represent indecision. The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both bulls and bears were active during the session. Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime. Neither buyers nor sellers could gain the upper hand and the result was a standoff. After a long advance or long white candlestick, a spinning top indicates weakness among the bulls and a potential change or interruption in trend. After a long decline or long black candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend