Basic Components 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 a trading day.
Lowest Price: The lowest transaction price during a trading day.
Candlesticks typically consist of three parts:
Upper Shadow: Located above the candlestick, representing 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 and closing prices. A bullish candlestick (red or white) indicates that the closing price is higher than the opening price, while a bearish candlestick (green or black) indicates that the closing price is lower than the opening price.
Lower Shadow: Located below the candlestick, representing the price range between the lowest price and the opening price (or closing price, depending on the candlestick's color).
Interpretation Methods of Candlesticks
Interpretation of a Single Candlestick
Bullish and Bearish Candlesticks: A bullish candlestick indicates that the market rose during that period, while a bearish candlestick indicates a decline.
Body Size: The longer the body, the stronger the market's momentum. A longer bullish body indicates sufficient upward momentum; a longer bearish body indicates stronger 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; a longer lower shadow indicates stronger support.
Interpretation of Candlestick Patterns
Double Bottom and Double Top: A Double Bottom (W bottom) signals a market reversal from a downward to an upward trend; a Double Top (M top) signals a market reversal from an upward to a downward trend.
Head and Shoulders Bottom and Head and Shoulders Top: The Head and Shoulders Bottom is a market reversal pattern indicating an upward trend, while the Head and Shoulders Top indicates a market reversal pattern signaling a downward trend.
Pregnant Line: The pregnant line usually indicates that the market may soon reverse.
Doji: A doji represents that the opening price and closing price are the same during that period, indicating a balance of power between buyers and sellers. A doji appearing at a high point may signal a top, while one appearing at a low point may signal a bottom.
Three White Soldiers and Three Black Crows: Three White Soldiers consist of three consecutive bullish candlesticks, indicating a strong upward market; Three Black Crows consist of three consecutive bearish candlesticks, indicating a weak downward market. However, it should be noted that Three Black Crows during an upward trend may indicate accumulation of power by the bulls.
Combining Position and Volume
Position: The position of the candlestick is crucial for determining its nature. For example, a long upper shadow appearing in the early stages of an upward trend may indicate a test by the main force, while one appearing in the late stages may signal a top.
Volume: Trading volume is an important indicator for judging market trends. In candlestick charts, volume is often analyzed in conjunction with the size or color of the candlestick body. For example, a bullish candlestick with increased volume usually indicates sufficient upward momentum; conversely, a bearish candlestick with increased volume may indicate strong downward momentum.
