In the world of stocks, futures, options forex trading, it is vital to have a clear visual representation of price action during a given period. Candlestick patterns are a superior tool for technical analysis of equities and currency price movements. While there are various stock charts available, the most detailed range of information can be obtained by using candlestick patterns, which are easy to read and interpret.
Their appearance is just like that of an actual candle, hence the name candlestick. The only difference being is that it has a wick at both ends. The wick is called a shadow.
The body will usually be usually colored white or black, denoting different situations. Some charts may have other colors like red or green. If the candle color is white, then the bottom end of the main body will represent the opening price and the top will be the closing price. If the candle is black, then the top end of the body will be the opening price and the bottom will be the closing price.
The shadows or wicks at the end of the main body represent the highs and low range. The high being the top most part of the upper shadow and the low being the bottom of the lower shadow. In some cases a candlestick may not necessarily have a body or a wick.
This kind of visual information tells the trader vital information about the open and close price, as well as the highs and lows in a given time. It is precisely this display that makes candlestick patterns an important and vital tool when trading stocks. If you have ever watched a stock market video, you will see all the computer screens in the background with candlestick charts displaying.
Of all the patterns, there are 12 that are considered the more important. They provide the user with enough information so he can make the best possible decisions, whether it is buying equities, currencies, stocks or options.
Here is an example of a pattern and what it means:
Bullish Engulfing would be depicted by two candles. The first candle represents the first day and is black in color; this means it closes lower than it opened. It is also a short candle, which means it has a low volatility and sellers are not very aggressive. The next candle for the second day is white, showing it closes higher than it opened. It is a taller candle (Engulfing the previous in size), closing higher than the first day. This indicates that buyers are being bullish and taking control of the stock, suggesting that there is a price increase.