It originated in Japan over 100 years ago before the West developed bar, dot and number charts. In the 1700s, a Japanese man named Homma discovered that although there was a connection between price and the supply and demand for rice, markets were strongly influenced by the emotions of traders.
Candlesticks show this emotion by visually representing the size of price movements with different colours. Traders use candlesticks to make trading decisions based on recurring patterns that help predict the short-term direction of price.
Candlestick charts are used by traders to determine possible price movements based on past patterns.
Candlesticks are useful when trading because they display four price levels (open, close, high and low) for the entire period specified by the trader.
Many algorithms rely on the same price information shown in candlestick charts.
Much like a bar chart, a daily candlestick shows the open, high, low and close prices of the market for the day. The candlestick has a large part, called the “real body”.
This real body represents the price range between the open and the close of trading on that day. When the actual body is filled or black, it means the close was less than the open. If the actual body is empty, it means that the closure was greater than an outdoor one.
Chandeliers are created by upland movements in price. No pattern always works because candlestick patterns represent trends in price movement, not guarantees.
A bearish engulfing pattern turns into an uptrend when there are more sellers than buyers. This action results in a long red royal body enveloping a small green royal body. The trend indicates that the sellers have regained control and the price may continue to decline.
Bullish Engulfing Pattern An engulfing pattern on the bullish side of the market occurs when buyers outweigh sellers. This is reflected in the graphic as a long green royal body enveloping a small red royal body. With the bulls having some control, the price could rise.
An Evening Star is a hedging pattern. It is identified by the last candle in the pattern which opens below the small real body of the previous day. The small royal body can be red or green. The last candle closes deep into the royal body of the candle two days ago. If the price continues higher afterwards, all may still be well with the uptrend, but a down candle following this pattern indicates a further slide.
A bearish harami is a small real body (red) completely inside the previous day’s real body. It’s not so much a model to act on, but maybe it’s a model to look at. The diagram shows the indecision of buyers. If the price continues to rise thereafter, everything could still be fine with the uptrend, but a bearish candle following this pattern indicates a further slide.
This pattern begins with what is called a “long white day”. Then, in the second, third and fourth trading sessions, small real bodies push the price down, but remain within the long price range of the white day (the first day of the pattern). The fifth and final day of the model is another long white day.
Even though the setup shows us that the price has been falling for three consecutive days, no new lows are seen and bullish traders are preparing for the next move higher.
A slight variation of this pattern is when the second day increases slightly after the end of the first long day. Everything else in the model is identical; it just looks a little different. When this change occurs, it is called the “Rising of the mat“.
In the end, while Japanese rice merchants have discovered centuries ago, investor emotions surrounding the activity of activity have a significant impact on the movement of this asset.
