A candlestick consists of a body (the area between the open and the close) and an upper and a lower shadow (price excursions above and below the real body), which are also referred to as “wicks” and “tails”.
If the prices rose during the time period, the candle is usually painted in white or green. In this case, the opening price at the bottom of the body and the closing price is at its top.
If the prices fell during the time period, the candle is usually painted in black or red. In this case, the opening price at the top of the body and the closing price is at its bottom.
The top of the upper shadow is the “high” made during the time period, while the bottom of the lower shadow is the “low”. To sum up, each candlestick provides a clear picture of the price action.
The longer the body is, the more intense the buying/selling pressure is. Short candlesticks, on the contrary, indicate little price movement and represent consolidation.
A candlestick with a very small body (open and close are virtually equal) is called “Doji”. On its own doji is neutral. However, if doji forms after a series of bullish candles with long bodies, it signals that the buyers are becoming exhausted and weak and the price may reverse downwards. If doji forms after a series of bearish candles with long bodies, it means that sellers are getting tired and the prices may reverse upwards.
There are several types of doji.
Long-legged doji has long upper and lower shadows that are almost equal in length and reflect a great amount of indecision in the market. Dragonfly Doji is a significant bullish reversal pattern that mainly occurs at the bottom of downtrends. Gravestone doji is a significant bearish reversal pattern that mainly occurs at the top of uptrends. Four price doji is very rare and represents complete and total uncertainty by traders concerning the market direction.
Candlesticks with short shadows indicate that most of the trading action was confined near the open and close. Candlesticks with long shadows show that prices extended well past the open and close.
Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated during the session, but by the end of the period sellers managed to pull prices down from their highs. Candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the session, but by the end of the period buyers managed to push prices higher.
Candlesticks with long both upper and lower shadows and small real body are called “Spinning tops”. Spinning tops are the signs of the market’s indecision: both bulls and bears were active, but neither manages to sustain gains. After a long advance or long bullish candlestick, a spinning top indicates weakness among the bulls and a potential change or interruption in trend. After a long decline or long bearish candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend.
A candle without upper or lower shadows is called “Marubozu”. A bullish Marubozu is formed when the opening price equals the minimum price and the closing price equals the maximum and shows that buyers controlled the price action during the entire period. A bearish Marubozu is formed when the opening price equals the maximum price and the closing equals the minimum price and shows that the price action was controlled by sellers.
Other articles in this section
- Uncovering Gann indicators
- How to create your own trading strategy?
- Candlestick Patterns
- Trend trading
- Trend trading
- Carry trade
- Swing trading
- Position trading
- Day trading
- Trading styles and strategies
- Fibonacci tools
- Trader's psychology
- Identifying market’s reversal
- Market conditions: trends and ranges