What is a candlestick pattern? How to read them?

What is a candlestick?

A candlestick is a type of chart that is commonly used in technical analysis to display the price movements of a financial instrument, such as a stock, currency, or commodity, over a specific period of time. Each candlestick is represented by a “real body” which displays the open and close prices and “tails/wicks”, which display the highest and lowest prices reached during the period.

What is a Candlestick?
A bearish Candlestick

The red rectangular part as seen in the image above is called body and the thin line on top and bottom of body is called tail/wick/shadow.

In a candlestick pattern, the body represents the area between the open and close prices of a financial instrument during a specific period of time. The body is typically shown as a rectangle and its color can indicate the direction of price movement. A white or green body indicates that the closing price was higher than the opening price, indicating a bullish movement, while a black or red body indicates that the closing price was lower than the opening price, indicating a bearish movement.

The tail/wick is the line above or below the body that represents the high or low price for the period. A tail above the body is called an upper tail or upper wick, and it represents the highest price reached during the period. A tail below the body is called a lower tail or lower shadow, and it represents the lowest price reached during the period.

In a candlestick chart, the upper and lower tails can provide insight into market sentiment. For example, a long upper tail on a candle can indicate that bears (sellers) tried to push the price down and were ultimately successful, indicating that bulls (buyers) lost the grip. Similarly, a long lower tail on a candle can indicate that bears(sellers) tried to push the price down but were ultimately unsuccessful, indicating that bulls (buyers) tightened the control.

It’s worth noting that the length and position of the tails can provide additional information about the market sentiment and can be used to identify potential buying and selling opportunities.

In other blogs we will look into most common single candlestick patterns like Hammer and Shooting star, Marubozu, spinning top, Doji and Hanging Man.

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