A candlestick chart is a type of financial chart used to illustrate movements in the prices of currencies, derivatives, or securities over time. The chart is constructed by plotting the open, high, low, and closing prices of the security for a given interval. The body of the candlestick is drawn as a rectangle, and the length of the rectangle is proportional to the magnitude of the price change between the open and close. The candlestick’s “wick” is drawn as a line extending from the body to the high and low prices.
These are among the most popular charts used by traders since they’re easy to read and provide a wealth of information at once. Seeing the opening price, closing price, high price, and low price in a single chart gives traders everything they need to know about the price action for a specific period. There are over 30 candlestick chart types, though they can be divided into a few main types. The goal of these various chart types is to go beyond displaying the verifiable information in trades and provide hints into the emotions behind trading trends. Here are the three main types of candlestick charts and explanations on how to read and use each one.
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Hammer Candlestick
The hammer candlestick chart is a type of candlestick that is used in financial data analytics to identify bullish and bearish reversals. The hammer candlestick is identified by a long lower shadow and a small body that is located near the high of the day. The hammer candlestick indicates that the bears were able to push the price lower during the day, but the bulls were able to push the price back to the opening level before the close. This indicates that the bears are losing control and that the bulls are starting to take control of the market. The hammer candlestick is also known as the “bullish reversal” pattern.
Hanging Man Candlestick
The hanging man candlestick is a type of candlestick chart that is used to indicate a potential reversal in the price of a security. The hanging man candlestick is characterized by a long body with a small lower shadow and no upper shadow. The hanging man candlestick typically indicates that security has been overbought and is likely to experience a reversal in the near future. The hanging man candlestick is also known as the “bearish reversal” pattern.
Inverted Hammer Candlestick Chart
An inverted hammer candlestick chart is a chart pattern that is used by technical analysts to indicate a potential reversal in the price of a security. The inverted hammer candlestick is formed when a security’s open is lower than the close, the security’s high is lower than the previous day’s high, and the security’s low is higher than the previous day’s low. The inverted hammer candlestick pattern is typically bullish and is used to suggest that the security may be nearing a bottom. This indicates that the sellers were unable to maintain control of the market and that there may be a reversal in the current trend.
Reliability of Candlestick Patterns
Candlestick charts are among the oldest forms of financial charting and technical analysis, and mastering them can be an important part of your wealth management. They are believed to be reliable because they are based on price action, which is the actual movement of a security’s price. Many modern forms of financial analysis are based on indicators, such as the Consumer Price Index (CPI), GDP deflator, and Product Price Index (PPI), which can be generated from price data. However, these indicators can be manipulated and are not always accurate.
Price action, on the other hand, is not dependent on such indicators and is, therefore, a more reliable measure of a security’s movement.
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