In this tutorial I am going to explain how to read and understand candlestick charts without any complication. When I was interested about stock market, I tried to learn how to read candlestick charts. Most of the information I found was complicated and full of jargons, it took a while for me to understand them. That is the reason I have decided to write this tutorial in such manner so a beginner can understand easily without using much of jargons. However before you go through with this advanced tutorial I would request you to go through with the basic tutorials first if you already have not read them yet. Those basic tutorials are The Basic Terms of Stock Market, Basic Terms of Investment and Trading, Basic FAQs for the beginners in stock markets, Few preliminary basic terms of Trading, Basic homework for beginners for stock market. But first that please do not forget to check whether you are suited for stock markets or not from Few questions you need to ask yourself before your first step in stock market.
Why should I read candlestick charts?
Candlestick chart is capable of showing whereabouts of a stock in given time including indicating open, high, low, close and volume. By learning candlestick patterns we can predict what might happen next with a particular stock.
Before we dive into, two things you really need to know the meaning of bullish and bearish.
What is bullish?
Usually there are two types of traders in a stock market buyers and sellers. When buyers become heavy on a stock and start buying that stock, the stock price increases and that trend call bullish trend. When there is a bullish trend the closing price of a stock would always higher than opening price.
What is bearish?
Bearish is exact opposite of bullish. When sellers become heavy on a stock and start selling that stock, the stock price decreases and that trend is called bearish trend. When there is a bearish trend the closing price would be always lower than opening price.
Lets look
at the first picture. We see there are two candlesticks. In a candlestick chart each candle reflects stock price of a specific period. If you look at minute chart each candle reflects stock price of every minute. The same goes for hourly or daily charts, every individual candlestick reflects stock price of each hour or day.
The rectangular part of a candle is called body of a candlestick, and the long line at the top and bottom of every candle is called shadow/ tail/ wick.
Now lets look at the next picture. Look at tails or the lines above and below the body. The top tails represent high or high price, and the bottom tails represent low or low price. And these tail values always stay constant that means top tail or line would always represent high price and bottom tail would always represent low or low price.
Now lets come to the body, if the body is marked in green or white then it indicates the trend was bullish. If the body is marked with red or black then it indicates the trend was bearish.
If the candle reflects bullish trend, the bottom body of the candle shows the opening price of the stock and the top body shows the closing price.
Bearish trend is completely opposite of Bullish. If the candle reflects bearish trend, the top body shows the opening price of the stock and the bottom body shows the closing price.
What does long green/white body means?
Long green/ white body means on that given period buyers were heavy and sellers did not have much of impact on the stock and the stock opened near low price and closed near high price. Or we can also say that the stock closed much higher than opening price.
What does long red/black body means?
Long red/ black body means that the sellers were heavy and buyers did not have much of impact on the stock on that given period and the stock opened near high price and closed near low price. Or we can also say the stock closed in much lower price than opening price.
What does long top tail means?
Long green top tail means buyers were able to increase the stock price beyond closing price, however sellers were able to bring that stock price down at the end.
What does long bottom tail means?
Long bottom tails means some point of time during that interval the sellers became heavy and able to decrease the price below opening price. However before the end of the session buyers became heavier on the stock and able to increase the stock price.
What does short top tail means?
Short top tail means mostly sellers were heavy on the stock. Some point of time buyers were able to increase the price above closing price and finally sellers were able to decrease the stock price again.
What does short bottom tail means?
Short bottom tail means mostly buyer were heavy on the stock. Some point of time sellers were able to decrease the price below opening price, however finally buyers were able to increase the stock price.
For reference you can look at the ideal bullish and bearish trend image.
Based on above reference we will learn about some basic candlestick patterns. I’m going to use the name of the patterns for the reference, if you find it is confusing to remember all these names, in that case you can forget about names and try to remember the patterns and their significance.
Marubozu: It looks like A complete long body without any shadow. As we learned earlier depending on it’s colour it is either completely bearish or bullish. So, if we have green or white long body but no shadow, in that case the trend was bullish and we can also say that sellers did not have much of impact on the stock price. If the colour of the long body is red or black without any shadow we can say that it was bullish trend and buyers did not have much of impact on the stock price.
Hammer: Square shaped body with long bottom tail and almost no or little top tail is called hammer pattern. Hammer means sellers were decreasing the price of the stock, however buyers were able to gain control and push the stock price up, finally stock price closed near high price. The longer is the tail, the more aggressive buyers are. After hammer pattern, if the stock price opens higher than previous close then we can confirm that buyers are in control currently.
Inverted Hammer: Square body with longer top tail and almost no or little bottom tail is called inverted hammer. Inverted hammer is complete opposite of hammer trend. This means buyers were pushing the stock price higher, however sellers were able to gain control and decreased the price down. An finally the stock price closed near or lower than open price. The longer the top tail the more aggressive sellers are. After inverted hammer pattern, if stock price opens lower than previous close then we can confirm that the currently sellers are in control.
Shooting star: A small rectangular body with long top tail and almost no or little bottom tail represents shooting star. Don’t get confused with hammers and shooting starts. Hammers body are usually square and shooting stars are usually small rectangular, shorter in height. Shooting star is exactly opposite pattern to inverted hammer. It means buyers pushed the price higher during the session however eventually sellers were able to gain control and bring down the stock price. After shooting star pattern if the stock price opens lower than previous close then we can say that sellers are in control of the stock or the stock is currently bearish. If the stock price opens higher than previous close than we can understand buyers are assuming control.
Spinni
ng Top: Small body with long top and bottom tail indicates spinning top trend. It is a neutral pattern which means neither buyers nor sellers had much of an aggressive control over the stock price. It is believed that if spinning top pattern appears, the trend is much likely to reverse. If spinning top appears during bullish trend that means buyers are loosing control over the stock and sellers much likely to gain control on the next session. The same goes for bearish trend as well, if spinning top pattern appears during bearish trend that means sellers are loosing control over the stock. And much likely buyers would gain control on the next session.
Hanging Man: A small body with longer bottom tail and almost no or little top tail indicates hanging man trend. The bottom tail must be twice of the size of the body in order for it to become valid hanging man. This trend indicates that sellers were decreasing stock price. However buyer gained control of the stock and pushed the stock price up and sellers were not able to decrease the price. Finally the stock price closed near high price. Whenever hanging man appears most likely the trend is going to shift from bearish to bullish or we can say that seller are loosing control over the stock and buyers are gaining it. So, much likely the next trend will be bullish and buyers will push the price upwards.
Doji: When long top and bottom tail with almost no or little body appears we call the trend as doji. Doji represents that neither buyer nor sellers were able to control the stock completely. Buyer pushed the stock price up and sellers pushed the stock price down, however the stock closed at or near open price. Usually doji do not form with any color. In Chart Infinities doji are indicated in pitch black colour unlikely normal red or green. Doji is also trend reversal indicator as spinning top. That means if doji appears during bullish trend, the trend much likely to become bearish and if doji appears during bearish trend then the trend much likely to become bullish.
There are five type of doji neutral, long legged, gravestone, drangfly, four price.
Neutral Doji:
It looks like two similar size lines one is vertical and another is horizontal has crossed each other from the middle. It looks like a plus icon (+) or a cross sign. It indicates buyers and sellers both were active some point of time however no group was able to control the stock price. Finally the stock price closed at or near open price.
Long Legged Doji: Tiny body with long top and bottom tail indicates long legged doji pattern. It means buyers and sellers both were hyper active sometime during the session, however no group was able to control the stock. Finally the stock close at or around opening price.
Gravestone Doji: Tiny body with long top tail and no or almost no bottom tail indicates gravestone doji trend. It means during the session buyers were very active and able to increase stock price at the beginning, however sellers were able to decrease the price but not able to control the stock. Finally the stock closed at or around opening price.
Dragonfly doji: It’s complete opposite of gravestone. Tiny body with long bottom tail and no or almost no top tail indicates dragonfly doji. It means during the session sellers were active and decrease the stock price, however at the end buyers were able to push the stock price near opening price and not able push the price beyond that. Finally the stock closed at or around opening price.
Four Price: It looks like a straight horizontal line with no or little top and bottom tail. It means neither buyers nor sellers had the strength to increase or decrease the stock price. The open, high, low and close price remained almost same.
These were the absolute basics of how to read candlestick charts. We should not rely on these basics for our investments. For more accurate analysis we need to learn advanced or complex candlestick patterns. Soon I’m going to write another tutorial about complex patterns and provide the link in here.
Before you start reading complex candlestick patterns, I would suggest you to go through with these tutorials which will help you further, those are How to calculate support and resistance level, How to read financial report or Balance-sheet, When Why and How stock price changes, Few things need to care about while trading.