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Candlestick pattern

Movement of prices shown on a candlestick chart

Candlestick pattern

Movement of prices shown on a candlestick chart

In financial technical analysis, a candlestick pattern is a movement in prices shown graphically on a candlestick chart that some believe can help to identify repeating patterns of 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. There are 42 recognized patterns that can be split into simple and complex patterns.

History

Some of the earliest technical trading analysis was used to track prices of rice in the 18th century. Much of the credit for candlestick charting goes to Munehisa Homma (1724–1803), a rice merchant from Sakata, Japan who traded in the Dojima Rice market in Osaka during the Tokugawa Shogunate. According to Steve Nison, however, candlestick charting came later, probably beginning after 1850.

The most famous candlestick trader is the man who invented them, Munehisa Homma. He was a Japanese rice trader who tracked price action and saw patterns developing. He published his work in The Fountain of Gold — The Three Monkey Record of Money in 1755. In today’s dollars, he made about $10 billion.

Formation of candlestick

The aspects of a candlestick pattern

A candlestick chart (also called Japanese candlestick chart or K-line) is a style of financial chart used to describe price movements of a security, derivative, or currency. Stock price prediction based on K-line patterns is the essence of candlestick technical analysis. However, there are some disputes on whether the K-line patterns have predictive power in academia.

Candlesticks are graphical representations of price movements for a given period of time.

They are commonly formed by the opening, high, low, and closing prices of a financial instrument.

If the opening price is above the closing price then a filled (normally red or black) candlestick is drawn.

If the closing price is above the opening price, then normally a green or hollow candlestick (white with black outline) is shown.

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.

The lines above and below, known as shadows, tails, or wicks, represent the high and low price ranges within a specified time period.

However, not all candlesticks have shadows.

Simple patterns

[[File:Shaven-head.svgx100pxcenter]]Shaven Head A black or white candlestick with no upper shadow. [Compared with hammer.][[File:Shaven-bottom.svgx100pxcenter]]Shaven Bottom A black or white candlestick with no lower tail. [Compare with Inverted Hammer.]

Complex patterns

[[File:The island reversal new.jpgx100pxcenter]]Island reversal In both stock trading and financial technical analysis, an island reversal is a candlestick pattern with compact trading activity within a range of prices, separated from the move preceding it. A "candlestick pattern" is a movement in prices shown graphically on a candlestick chart. This separation shown on the chart, is said to be caused by an exhaustion gap and the subsequent move in the opposite direction occurs as a result of a breakaway gap.

References

References

  1. (2023-12-29). "Introduction of Bearsh chart patterns: How to become profitable in trading with the help of them - Trading Counselor".
  2. (1991). "Technical Traders Guide to Computer Analysis of the Futures Markets".
  3. "Candlestick Patterns: A Complete Tutorial".
  4. "Introduction to Candlesticks". Stockcharts.com.
  5. "Honma, The Fountain of Gold".
  6. (2017). "K-Line Patterns’ Predictive Power Analysis Using the Methods of Similarity Match and Clustering". Mathematical Problems in Engineering.
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