As Charles Dow’s postulate says: price takes everything into account. Everything that could influence the price has already influenced it. And price change is the result of this influence.

That’s why the price chart is very informative, you can understand from it what happened, is happening and may happen on the market. That is why so much attention is paid to graphical analysis.

There are different ways of displaying the price chart: linear, bar, kagi, crosses and others. The most popular are linear, bar and candlestick. But out of these three, the candlestick method of display can be called the most informative and convenient for perception.

The emergence of candlesticks allowed to look at the market in a different way, and a whole separate direction of studying charts and predicting further movement appeared, which was called Candlestick analysis.

We will talk about the history of emergence, features and rules of candlestick analysis application in this article.

History of emergence

The history is quite simple. A Japanese trader invented candlesticks to better see the dynamics of rice prices at the commodity exchange. Japanese candlesticks made it possible to display the maximum and minimum that the price reached during the trading day.

Later candlesticks began to be used on other time intervals. And then they reached the European and American markets, where they quickly gained popularity.

Хотя свечи, как и бары, дают информацию о тех же ценах: цене открытия, закрытия, максимальной и минимальной цене, — они всё же более наглядно, легче воспринимаются глазом. Поэтому количество трейдеров, которые переходили с других способ отображения цены на свечи, становилось всё больше и больше.

Appearance

The candlestick consists of a rectangular body and two shadows or tails, the extreme points of which show the maximum and minimum where the price was for the selected timeframe, for which the candlestick shows the price change.

The body of the candlestick is formed from below and above by two prices: the opening price and the closing price.

If the price has increased during the lifetime of the candle, its closing price will be higher than the opening price. Such a candle is called an ascending or bullish candle. If the price has fallen and the closing price will be lower than the opening price, the candle is called a descending or bearish candle.

Usually the body of a bearish candlestick is colored, while the body of a bullish candlestick is not. And thanks to this, Japanese candlesticks are clearer than the same bar. By their bodies you can see at once whether the price is falling or rising. You don’t need to look at the bar to see whether the line on the right is higher or lower than the line on the left.

The shadows show the extreme values, where the price was until the candle closed. It can be that the price immediately from the opening rushed to one side and moved without stopping. Then the candlestick will have no tails. That is, its opening and closing prices will be simultaneously the maximum and minimum High and Low prices.

The appearance of the candle itself carries a lot of information. For example, if the candle has a large bullish or bearish body without shadows, it means that some strong directional movement is in full swing, which does not meet resistance.

On the contrary, if the candle has a big tail, it indicates possible resistance from that side. That is, the price went to that side, but it was pushed out of there, which is evidenced by the shadow. If such a shadow is at the bottom, it means that buyers are pushing, if at the top – sellers.

Let’s, take a look at a few of the strongest candlestick formations.

Candlestick patterns

Candlestick patterns are a combination of one or more candlesticks, which periodically repeat and speak about the same situation in the market.

Knowing about them, understanding what caused their formation, you can make predictions and even make entire trading systems.

Hammer

The Hammer is also called a Pin Bar. It is a strong trend reversal pattern consisting of only one candle.

It looks like a candle with a small square body and a large tail on one side, while on the other side there is no shadow, or it is very small. The tail should be at least 2-3 times larger than the body of the candle.

The important point is the place of appearance of this pattern.

The Bull Hammer occurs at the end of a downtrend. It has a large lower shadow and almost no upper shadow. Whether the body is painted or not is not important. An example of a Bull Hammer was given above.

The Bear’s Hammer appears at the end of an upward movement. It has a large shadow on top. The color of the body is also unimportant.

In the case of candlestick patterns, where the key component is a large tail, such as the Hammer, the speed of formation of this tail can be a remarkable fact. The fact is that often the price moves in a trend, reaches some strong historical level and makes a sharp rebound from it, forming a large tail of the candlestick. This is due to the fact that strong historical levels usually have large densities of pending orders. As soon as the price reaches them, they are activated, and as a consequence there is a sharp price bounce.

It is not necessary to always keep a close eye on the price to be able to notice this sharp movement on the rebound. It can happen in a second. The fact that the Hammer appears is more important. But still, if you managed to see a sharp market reaction to the price approach to the level, it gives you more confidence that a reversal can really happen from this level, and therefore the Hammer gains even more weight.

Volchki

A volcano looks like a small candle with a short body and medium shadows at the top and bottom that are almost equal to each other.

The appearance of one or more waves in a row often occurs after a trend and indicates that the strength of the trend is running out and tangible resistance is emerging.

You can see from the tails of the wavy wave that the price was tried to be dragged both up and down, but neither buyers nor bears gave in. That is, the Volchok is a place of struggle and balance, until one of the sides gains the upper hand.

It can precede a trend reversal and its continuation, showing just a place of respite for those who were leading the trend before.

Dodgy

These candles are very similar to Wiggles, except that their opening price is equal to the closing price. But the logic behind the appearance of such a candle is the same: there was some movement, but then the price hit resistance, and the price cannot move further. It may be that those who moved the trend have no interest in opening new deals, and there are no new willing traders, or maybe they met strong players trading in the opposite direction. In any case, something must happen after the doji, so it is worth keeping an eye on their appearance and further developments.

The Doji most often appears at the ends of trend movements, signaling a reversal.

Marubosu

This is the name given to candles with large bodies, and most importantly, with no shadows.

The absence of tails and rather large bodies indicate the prevailing strength of buyers or sellers, who move prices in one direction and do not meet any resistance.

Such candles can be considered as a sign of continuation of the current movement.

These are not all candlestick patterns, but only the strongest and, we can say, basic ones, the logic of which is found in other more complex candlestick formations.

Here are examples of compound trend reversal patterns:

Here are examples of the most popular trend continuation patterns:

Recommendations

First of all, it is important to understand the logic, the market processes that cause certain candles to form. But you should not take candlesticks themselves as a signal for immediate action. They are only signs of possible changes in the trend or its continuation, but not a 100% signal. It is better to use candlesticks as a tool of additional analysis to other trading rules of your trading system.

For example, if you use historical levels, Fibonacci levels, moving averages or something else to determine entry and exit points, then the appearance of a candlestick pattern at a historical level or another level of support and resistance will be important information for you. The candlestick pattern will confirm your point, giving it additional weight.

But it is quite risky to trade a candlestick pattern that suddenly appeared on an empty place. After all, it may be just a coincidence that the candlestick was displayed in such a way only because the timeframe just ended, the candlestick closed, and there was no real background for the formation of this or that formation.

Information that an experiment was conducted to measure the quality of candlestick patterns. They found a candlestick pattern and looked whether it was worked out during the next 7 trading sessions. The results showed that they worked out only in about 30% of cases. Whether we can trust this data or not is an open question. It is not possible to check these observations specifically. But if they are true, it is one more reason not to use candlestick analysis in isolation from the context.

Like many other analysis tools, candlesticks work better on large time intervals, such as D1. They show more global processes here. Besides, most traders look at the older timeframes, they will definitely notice the signal, so it is more likely to work out. After all, on large time intervals there are no such rapid changes of formations on the chart, as, for example, on minute timeframes.

Conclusion

The chart is practically the only source of information about the situation on this or that financial instrument, which is available to a trader. Therefore, it is worth paying the closest attention to it.

And Japanese candlesticks greatly simplify the work with it and help to notice signals and hints about the possible further development of events. Therefore, any beginning trader should try to know these signals and learn to notice them.

But nevertheless, it is not worth relying only on the information from Japanese candlesticks. They give only a general idea about the possible balance of forces. But it is not recommended to look for an entry point only on them. It is better to supplement your analysis with other technical analysis tools.