Candlestick Patterns

 WHAT ARE CANDLESTICK PATTERNS

Candlestick patterns are graphical representations of price movements that some traders believe can predict a specific market movement. There are candlestick charts with 42 recognized patterns, which can be categorized into simple and complex patterns. However, the recognition of these patterns is subjective, and charting programs have to rely on predefined rules to match the pattern. Thomas Bulkowski has extensively studied 103 candlestick formations, providing identification guidelines, statistical analysis of their behavior, and trading tactics. The study includes statistical summaries, a glossary of relevant terms, and a visual index to make candlestick identification easier.

HISTORY OF CANDLESTICK PATTERN

In the 18th century, technical trading analysis was used to track rice prices, and Munehisa Homma, a rice merchant from Sakata, Japan, is credited with much of the development of candlestick charting. He traded in the Ojima Rice market in Osaka during the Tokugawa Shogunate. However, according to Steve Nison, candlestick charting likely began after 1850.

HOW CANDLESTICKS ARE FORMED

Candlesticks are visual representations of price movements in a given period, based on the opening, high, low, and closing prices of a financial instrument. A filled (red or black) candlestick is formed if the opening price is higher than the closing price, while a green or hollow (white with black outline) candlestick is formed if the closing price is higher than the opening price. The body or real body of the candlestick can be long, normal, or short, depending on its proportion to the lines above or below it. Shadows or wicks represent the high and low price ranges within a specified time period, but not all candlesticks have shadows.