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Candlesticks 101

Candlesticks 101

Today, let’s learn one of the tools you can learn to start trading – Candlesticks.

Candlesticks basically represent the price of a stock. This concept originated in Japan and further developed by Steve Nison. You can read up a lot of information online about the history of candlesticks, but for now, let’s get into the basics. Charts can sometimes look intimidating to newbie traders. With practice and dedication, you can master these candlesticks and use them to your advantage.

At first, it may difficult to spot candlesticks, but with consistent practice you will get used to it.

Most people say trading is an art, not an exact science. The examples I will show are based on HOW I see the chart. You may have different interpretations, feel free to comment and let’s learn together!

Dissecting candlesticks’ anatomy

Candle

Source: http://www.investopedia.com/articles/technical/02/121702.asp

There are 4 elements you can see in a candlestick:

H – High – refers to the highest price of the stock for the day.

O – Open – refers to opening price of the stock. 

C – Close – refers to the closing price.

L – Low – refers to the lowest price of the stock.

Which of this four do traders look at? It’s the closing price.

Easy, yeap? Let’s move on.

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Candlestick Formations

Hammer

candle1

I was trying to look for recent samples of candlesticks formations so let’s see if I’m able to see few examples.

Hammer is a bullish reversal pattern. Mini as it is in the above example, you have either a red or green solid body (doesn’t matter which color) and then you have a wick at the bottom. That’s why it’s called a hammer 🙂 It can signify that price decline may soon end and you may see an uptrend.

Inverted Hammer

candle6

The inverted hammer, is obviously a hammer turned upside down. It signifies same uptrend to follow. Look at the example above for $BEL. Nice uptrend there 🙂

Hanging man

Hanging man is Hammer’s exact opposite. Let’s look at an example:

candle2

Though hanging man and hammer look alike, just check where this candle is located. A hanging man may signify that the uptrend may soon be over, as with the case in the above example for $ABS.

Shooting Star

Shooting stars can be green or red, doesn’t matter. It looks like an inverted hammer. It may mean a downtrend move as with the below example:

candle7

Gravestone Doji

What is the most significant characteristics of dojis? Doji does not have a body – it will just look like a cross where the horizontal line can be on top (Dragonfly Doji), in the middle (an indecisive or inconclusive doji) or a Gravestone Doji (at the bottom).

candle3

 

A Gravestone Doji may signify an end of a rally. See example above for $AC. There’s actually a hanging man before it. Then a downtrend occurred.

If in the above examples we usually consider just one candlestick, now let’s look at candlesticks that work in tandem.

Bullish Harami

candle4

You see in the above example, the smaller green candle is mightier than the red one! It then paved the way for a longer uptrend. The bulls won!

Dark Cloud Cover

The name itself implies quite a bad omen to happen. And it does lead to a downtrend move. You have two candles to consider here. A bullish candle (green) and a bearish candle (red) that somewhat “engulfs” the green one after an uptrend.

Usually, the second candle closes below 50% of the previous candle. So the example below may not exactly fit a Dark Cloud Cover pattern. But hey, a downtrend move after. Tsamba?

Candle5

Piercing Line

For a piercing line formation, you will see a green candle almost engulfing a red candle. This sort of provides breather, and usually follows an uptrend.

candle13

Bearish Engulfing Pattern

Let’s look at how the red candle blocks the smaller green candle, signifying a downtrend move:

candle8

Bullish Engulfing Pattern

candle11

Though short-lived, I see a Bullish Engulfing Pattern in $IMP. Can you guess what pattern ended the uptrend? That looks like a Dark Cloud Cover to me 🙂

Tweezer Tops

What’s important to see in tweezer tops are two candles with same highs. In the below example, I think I saw two pairs of tweezer tops before a price decline:

candle9

Tweezer Bottoms

Tweezer Bottoms should have same lows:

candle10

Now let’s look at 3-candle patterns:

Bearing Abandoned Baby

Here, you have a green candle, a doji and  red candle:

candle12

As you can see in the above example, the doji somewhat signified weakness or indecision, validated by a red candle. After which we saw a downtrend. Can you identify the pattern that reversed the down move? Yup, it looks to me like a Tweezer Bottom 🙂

Morning Star

You have 3 candles to look for in this formation: One, a red candle. Second, a short green candle which is usually gapping down the first candle. Third, a validation from a third green candle.

candle14

Evening Star

Here, you have a green candle, a red candle gapping up, and a red candle confirming reversal of trend.

Hope the example shows the evening star formation though quite short-lived:

candle15

That ends our mini learning course on how to invest in Philippine stock market!

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