Candlestick Charting

Candlesticks are the most common form of price charting and are a graphical representation of the price action across a certain time period. A candle is constructed from the Open, High, Low, and Closing price of the underlying asset, with the Open to Close area forming the body, with price actions outside of this area being referred to as the shadow or the tail.

The body of the candle is coloured to indicate if the close is higher than the open (a green candle showing the price rose) or alternately coloured red to show the price closed below the open (example below).

This type of analysis is primarily useful for near term indications (i.e. less than ten candles ahead) and is best used in tandem with other technical analysis methodologies but can be helpful in identifying market reversals and provide insight into short term market sentiment or the strength of other indicators.

The form that each candle takes can tell us information about the market, with some of the most commonly referenced candles being listed below:

Standard Line:

Identifier: Strong body and small shadows

Meaning: The current trend is expected to continue

Spinning Top:

Identifier: A small body with long shadows on either side.

Meaning: A neutral pattern indicating consolidation while not triggering any directional conviction. This can hint at indecision within the market.

Hanging Man:

Identifier: Requires a prior upward trend and is confirmed by the price closing below the support within the next two periods or a break of either the support or a trendline.

Meaning: A relatively weak reversal signal which some traders see as a sign of trend continuation. The market is showing signs of weakness.

Hammer:

Identifier: Requires a prior downward trend with the long shadow illustrating a sentiment shift in the market.

Meaning: A strong reversal signal showing strong buying power from the support level.

Doji Types

Doji's are a special type of candle where the open and close price are at the same level and can be important indicators of a market reversal.

Long-Legged Doji:

Identifier: No body with long, roughly equivalent shadows on either side. This can occur in an upward or downward trend.

Meaning: Represents indecision in the market and can be a potential reversal signal. If the shadows low is broken by the next candle's close then it can be a trigger to sell.

Gravestone:

Identifier: No body with a long upward shadow only. It must occur in an upward trend to be relevant.

Meaning: Signifies the termination of an upward trend and the closing of the next candle below this low can act as a trigger to short the market.

Dragonfly:

Identifier: No body with a long downward shadow only. It must occur in a downward trend to be relevant.

Meaning: Signifies the termination of a downward trend and the closing of the next candle above this high can act as a trigger to go long in the market.