Understanding Basics of Candlestick Charts

Candlestick patterns play a key role in quantitative trading strategies owing to the simple pattern formation and ease of reading the same.

For using candlestick patterns, you only need to have a basic understanding of how the candlesticks are formed. Also having some idea about the various ways in which these candlesticks can be interpreted would be useful.

However, if you are new to candlesticks trading, this article will help you gain a complete understanding of candlesticks.
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The anatomy of the Candlesticks has stayed almost similar throughout the ages to give us the current shape and meaning. It consists of 4 distinct values namely:

The opening price,
Closing price,
The highest prices for a given interval, and
The lowest prices for a given interval.

It’s like a combination of a line chart and a bar chart, where each bar represents all four important pieces of information for an interval.

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Body
The hollow or the filled portion of the candlestick is called as the body of the candlestick.

Long Body - Indicates heavy trading in one direction and strong buying or selling pressure
Small Body - Indicates lighter trading or little buying or selling activity

Shadow
The long thin lines above and below the body is called the shadow of the candlestick.

Upper Shadow - High is marked by the topmost part of the upper shadow
Lower Shadow - Low is marked by the bottom part of the lower shadow.

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On the chart above, you can see how the body to shadow ratio defines the strength of the candlestick.

Learning to apply that in a combination with other technical tool can help you to quite reliable predict the price movements.

What do you want to learn in the next post?