Basic Composition of Candlesticks
Opening Price: The initial transaction price of the trading day.
Closing Price: The last transaction price of the trading day.
Highest Price: The highest transaction price during the trading day.
Lowest Price: The lowest transaction price during the trading day.
Candlesticks typically consist of three parts:
Upper Shadow: Located above the candlestick, it represents the price range between the highest price and the closing price (or opening price, depending on the candlestick's color).
Body: Represents the price range between the opening price and the closing price. A bullish candle (red or white) indicates that the closing price is higher than the opening price, while a bearish candle (green or black) indicates that the closing price is lower than the opening price.
Lower Shadow: Located below the candlestick, it represents the price range between the lowest price and the opening price (or closing price, depending on the candlestick's color).
Interpretation Methods for Candlesticks
Interpretation of a Single Candlestick
Bullish and Bearish Candles: A bullish candle indicates that the market has risen during that period, while a bearish candle indicates a decline.
Body Size: The longer the body, the stronger the market's attack. A longer bullish candle body indicates sufficient upward momentum; a longer bearish candle body indicates greater downward momentum.
Shadow Length: The longer the shadow, the stronger the resistance or support in that direction. A longer upper shadow indicates greater resistance to upward movement, while a longer lower shadow indicates stronger support.
Interpretation of Candlestick Patterns
Double Bottom and Double Top: A double bottom (W bottom) signals a transition from a downtrend to an uptrend; a double top (M top) signals a transition from an uptrend to a downtrend.
Head and Shoulders Bottom and Head and Shoulders Top: A Head and Shoulders Bottom is a pattern indicating a reversal to an uptrend, while a Head and Shoulders Top indicates a reversal to a downtrend.
Engulfing Candle: An engulfing candle typically indicates that the market may soon reverse.
Doji: A doji indicates that the opening price and closing price are the same during that period, signifying a balance of power between bulls and bears. Appearing at a high may indicate a top, while appearing at a low may indicate a bottom.
Three White Soldiers and Three Black Crows: Three White Soldiers are three consecutive bullish candles, indicating a strong upward market; Three Black Crows are three consecutive bearish candles, indicating a weak downward market. However, note that Three Black Crows during an uptrend may reflect accumulation of strength by bulls.
Combining Position and Volume
Position: The position of the candlestick is crucial for determining its nature. For example, a long upper shadow appearing at the beginning of an uptrend may indicate a test by the main force, while a long upper shadow at the end of an uptrend may signal a top.
Volume: Trading volume is an important indicator for assessing market trends. In candlestick charts, volume is often analyzed in conjunction with the size or color of the candlestick body. For instance, a bullish candle with increasing volume typically indicates strong upward momentum, while a bearish candle with increasing volume may indicate strong downward momentum.
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