Upper shadow
Body
Lower shadow
Highest price
Opening or closing price whichever is greater
Center section-The body is hollow (white) if the close is higher than the open
Opening or closing price whichever is less
Lowest price
What is a Candlestick?
Candlesticks represent price movement over a specified period, a day on this website, using the trading day’s open, high, low, and close prices. A candlestick consists of a box called the body, whose length reflects the difference between the opening and closing prices, and thin vertical lines called shadows above and below the body, representing the high and low prices reached during the day. A bullish day, with a closing price higher than the opening price, is depicted by a white (hollow) body, whereas a bearish day, with a closing price lower than the opening price, is shown by a black body. When the opening and closing prices are equal, the body becomes a short horizontal line, known as a Doji, which typically signifies indecision in the market.
Though single candlesticks convey valuable information about the changes in a market’s supply and demand balance, a succession of candlesticks taken together, are more pertinent for this purpose as they make a pattern. The superiority of candlestick patterns over other technical analysis tools in forecasting medium and particularly short term direction is proven. Forecasting with candlesticks requires the proper identification of more than eighty different patterns and a well behaved continuous set of data with no missing observations. Though the patterns on a chart can be roughly identified by eye, today’s computers can do this job efficiently and correctly.
This website and other websites of the bulls.com© family generate their trading signals on the basis of a computer based identification system by using a sophisticated algorithm. The system initially filters the data in order to prevent mistakes due to wrong or missing data. Candlesticks and patterns are then identified automatically and the system also establishes confirmation and stop loss levels for each pattern. Only price data is used. Volume data is omitted.
History of Candlesticks
The western world became acquainted with candlestick charting quite recently but this charting technique has been well known in Japan for a long time. Steve Nison introduced candlestick charting to the western world. According to legend, a Japanese trader Homma Munehisa developed candlestick charting to analyze the price of rice contracts in the 18th century and amassed a huge fortune using this method. Homma used Sakata’s Five Patterns, patterns derived from the rules used by local traders from his hometown of Sakata as the foundation of candlestick charting. Nison, however, argues that candlestick charting first appeared sometime after 1850. It is quite possible that Homma initiated this kind of charting in a crude form and his original ideas were later modified and refined over many years of trading eventually evolving to its current form by the late 19th century.
The bulls.com© family of websites makes a serious contribution to the otherwise stagnant literature of Japanese candlesticks by its automatic recognition system based on complex computer algorithms. The websites also highlight the importance of assigning proper confirmation and stop loss levels to all of the patterns and clearly demonstrate dramatic improvement in the success ratio of the pattern based signals.
Types of Candlesticks
Candlesticks are classified based on the body length, the presence or absence of shadows, and the shadow length. Body lengths, indicative of the strength of the daily price movement, are categorized as short, normal, and long. Candlesticks with small bodies (spinning tops) or no bodies at all (Doji) indicate market indecision. When the open, high, low, and close prices are all equal, a Four Price Doji, which lacks any body or shadows, may appear, often due to data errors or non-traded days. Long black or white (hollow) bodies with no upper shadows, lower shadows, or both, are referred to as Marubozu. The body color signifies market control: a white or hollow body indicates buyer control, while a black body indicates seller control.
Candlestick patterns, often analyzed as a group, are formed by sequences of two to five consecutive candlesticks, with two-day patterns being the most prevalent. Patterns spanning four or five days are quite rare. Typically, these patterns exhibit symmetry, where bullish formations have corresponding bearish counterparts that share similar shapes but differ in color and relative position. Nevertheless, a few patterns deviate from this symmetrical structure.
The bulls.com© family websites employ a proprietary algorithm to ascertain and classify body lengths during the candlestick identification process. Candlestick and pattern identification relies on specific algorithmic principles, detailed under the "Pattern Requirements and Flexibility" section on the candlestick pages. Doji, spinning tops, and high waves are categorized as distinct components of the overarching Doji family. The algorithm assigns a distinct stop-loss level and a unique confirmation level to each identified pattern. This system exclusively considers reversal patterns, disregarding continuation patterns.
Use of Candlesticks
Single candlesticks provide valuable insights into market sentiment and underlying price dynamics, especially when analyzed in the context of relevant news and fundamental factors related to a security. Candlesticks observed at key support and resistance levels warrant serious consideration as potential bullish or bearish reversal signals. However, it is essential to always consider the direction of the preceding trend.
Experienced technical traders tend to prioritize patterns consisting of two or more consecutive candlesticks over single candlesticks when evaluating the probability of a reversal. To execute a successful trade, it is crucial to wait for pattern confirmation before making any buy or sell decisions, even if the patterns have a high success rate for predicting reversals. Patience is essential because some patterns may emerge from short-term trends or horizontal movements and might never be confirmed. In cases of non-confirmation, it is prudent to wait, thereby avoiding a potential losing trade, and to look for new patterns to emerge, provided the stop-loss hasn’t been triggered during this period.
The bulls.com© family websites whose trading signals are derived from candlesticks and patterns are designed with due respect for all these subtle points. The algorithm will find new patterns at the end of each day if there is sufficient data. It establishes and revises, if necessary, the confirmation and stop loss levels on a daily basis. The history of candlesticks, patterns, their confirmations, and resulting signals are displayed separately for each security on the websites.