Candlesticks and their Combinations

How do most people visually imagine the price of an asset over time? I'm sure that most people imagine a wavy horizontal line that changes and curves up and down every second. In order to structure and give meaning to this constantly changing line, different types of price charts have been invented. The most popular types are Japanese candlesticks and bars.

What is common between these two chart types?

 Unlike the traditional linear chart, Japanese candlesticks and bars use as many as four data points for a given period of time instead of one:

 

1. The opening price when the time period began.

2. The highest point the price reached during the time period.

3. The lowest point the price reached in the period.

4. The closing price when the period ended

 It is these four points that increase the information value of the chart, which means they can immediately indicate what is happening in the market.

 Bars are the tools of western technical analysis, whereas the Japanese candlesticks are the tools of eastern technical analysis. Bars can be of ascending or descending order; Japanese candlesticks can also be bullish or bearish. Both charts convey the same information.

If there is so much in common between these charts and they convey the same information, why do most traders prefer Japanese candlesticks? This tool has gained its popularity not only due to the simplicity of interpretation of the market situation but also because they reflect the gap between open price and a closing price of a candlestick. This area is called the real body of a candlestick. The body helps us to better assess the overall situation in the market presented on a chart.

 

Let’s discuss the structure of Japanese candlesticks. A candlestick displays a range of price movement for a specific period of time (which we call a timeframe). A candlestick has a real body (it is usually painted black or white) and upper and lower shadows indicating the highest and lowest prices for a certain period.

Japanese candles come in three variations:

 

● Long body candlesticks

● Spinning Top and Paper Umbrella candlesticks

● Doji candlesticks

Long body candlesticks have very big bodies. A perfect long body candle also has minimal shadows. In this case, we understand that the price has a good direction. The smaller the shadow and the bigger the body are, the more reliable is the signal for us, which means that the market is heading in a certain direction.

 You might ask: how can I identify a long body candlestick? Just compare the candlesticks with each other. You can identify a long body candlestick among other just by eye.

 Spinning Top and Paper Umbrella candlesticks have a small body, while their shadow can be either large or small.

 Doji candlesticks have a very small body or do not have it at all.

 I am often asked which candlestick is better, i.e., more reliable? In principle, there are no "best candlesticks" in the market, because each of them provides a particular kind of information. For example, if we see long body candlesticks, we understand there is a purposeful and strong movement in the market. Long body candlesticks often break through the price range. That is, important levels are broken through with long body candlesticks. Patterns of technical analysis also usually break support or resistance level with long body candlesticks. Therefore, long body candlesticks are a kind of locomotive which drives the price. The rest of candlesticks (Spinning Top and Doji candlesticks) can form reversal candlestick configurations, indicating bouncing off a certain level and a trend reversal.

As for Doji candlesticks, they are considered to be uncertain in the market. Their body is small, and the open price is at the same point as the closing price. Nothing has changed in the market for this period of time. If we see a doji candlestick with an almost absent body and small shadow, it means that the price stands still and we are running in place. But if we see a doji candlestick with a small body and a big shadow, it can be a very strong signal. The nature of the signal depends on the direction of the shadow.

 As for the trade volume, it can be seen only on large candlesticks in most cases.

 Some Japanese candlesticks, which create certain combinations on the price chart, are called candlestick configurations (or candlestick patterns). They are divided into three types:

 

● Single candlestick patterns

● Dual candlestick patterns

● Triple candlestick patterns

 Single candlestick and dual candlestick patterns enjoy the greatest popularity.