CFA, Finance

What is Candle Stick Analysis?

WHAT IS CANDLESTICK ANALYSIS:

  • Candle Stick Analysis trace their roots to japan where Technical Analysis has been in use for centuries. Candle stick Analysis mainly focuses on individual candles, pairs or at most triplets, to read signs on where the market is going.

  • The underlying assumption is that all known information is already reflected in the price. The technique is usually combined with support & resistance. Support is the floor price that every market has shown unwillingness to trade over it in the past while resistance is the ceiling price which every market has shown unwillingness to trade over it in the past.
  • Just like a bar chart it also provides candles which contains information about 4 prices: the high, the low, the open and the close.
  • A candle body reflects the net price movement ‘between open and close while the wicks show reversals that occurred within the time frame of the candle.
  • In technical analysis, a candlestick pattern is a movement in prices shown graphically on a candlestick chart that some believe can predict a particular market movement. The recognition of the pattern is subjective and programs that are used for charting have to rely on predefined rules to match the pattern.

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GRAPHICAL REPRESENTATION:

 

  • Candle sticks analysis are graphical representations of price movements for a given period of time. They commonly provides four data point entry: the opening price, the closing price ,the high and the low prices during a period as depicted in the above exhibit
  • In the above exhibit , a vertical line represents the range through which security price fluctuate during the time period. This line is known as wick or shadow. This lines extends from the top and botom of the candle to indicate the high and the low prices for the interval.
  • The body of the candle is shaded when the opening price is higher than the closing price and the body is hollow if the opening price is lower than the closing price.
  • The filled or hollow portion of the candle is known as the body or real body, and can be long, normal, or short depending on its proportion to the lines above or below it. However, not all candlesticks have shadows

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 Types of Candle Stick Analysis Patterns:

Simple pattern Complex pattern
#Big Black Candle #Bearish Harami
#Doji # Evening Star
#Hammer # On Neckline
#Marubozu # Engulfing
#Shaven Head #Bullish Harami

Merits Of Candlestick Analysis:

  • Candlestick charts provide the most information out of any chart type.
  • A trader can gain real time experience by learning the patterns and potentially applying to get a better analysis of the chart.
  • A candlestick provides you with information about momentum when you compare the length and the position of the bodies.
  • Volatility can be analysed by using the wicks and the size of individual candlestick wicks.
  • The prices are much more visible in candlestick charts unlike bar charts.

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Demerits of Candlestick Analysis:

  • It is necessary to wait for confirmation of the stock market
  • It is difficult to use them on small time frames due to the algorithmic trading
  • A big number of possible candlestick patterns and their combinations.
  • There can be different interpretations to the same pattern.

Author: Bhagyashree Chandak
I aspire to become a research analyst and earn and use best of my knowledge.

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