Candlestick Charts: An Insight Into Market Sentiments

We keep coming across trade analysts talking about candlestick charts to analyze the trends in stocks or broader stock market. The difference between the bar/line charts and the candlestick charts is that the former will show you the price whereas the latter will also show the force and the direction associated with the force of movement in price. The bar charts will tell us about the high and low and the line charts will only tell us about the close whereas the Candlestick charts will provide dual information by telling us accurately what the price is doing at a given point of time.

Types of candlestick bodies:

1. BULLISH CANDLESTICK: These candles are green in color and show that the price has increased over the time or we can conclude through these candles that the closing price is higher than the opening price.

2. BEARISH CANDLESTICK: These are red in color and represent a decrease in price over the time period or we can conclude that closing price is lower than the opening price.

3. NEUTRAL CANDLESTICK: These candles do not have a body and here the opening price is equal to the closing price.

4. SHADOW: The remaining portion of the candlesticks chart I.e. other than the green and the red body which is depicted by thin lines is known as shadow or wick or tail of the candlestick. The length of the shadows gives an indication about market sentiment at the given day. For e.g. long upper tails usually represent bearish sentiment because they are formed when bulls try to take the prices to much higher levels but lose their control midway and prices close well below the high. Likewise, long lower tails are called bullish because the bears fail to undergo the pressure till closing.

Different types of candlesticks:

• MARUBOZU: A candle that does not have any upper or lower shadow is known as Marubozu. It’s a Japanese term meaning cropped or bald. A bullish Marubozu is formed when price increases right from start of the period I.e. opens low and closes high. Likewise, a bearish Marubozu is formed when price continues to fall i.e. open and high will be same and ends the day on a low.

• DOJI: Doji candles are formed when the trading ends at the opening price I.e. the open and close are at the same place. Hence there won’t be any body for the candle. It depicts indecisiveness in the market. The place where they are placed is of significance. The trend is said to be a bullish trend if it occurs after a long white candle because it indicates bulls get exhausted. Likewise, if it occurs after a long lack candle this means bears get exhausted indicating bullish trend.

• LONG/SHORT BODY: Just as a length of shadow is important so is the length of the body because it represents the gap between open and close represents the ability of bulls and bears to influence the price.

Readers are requested to stay tuned for further candlestick patterns and technical analysis.