Candlestick charts are used to read the stock market. Stock markets use red and green colored candlesticks, which are rectangle shapes with a vertical line at the top and bottom called shadows. The shadows resemble the wick of a candlestick. According to Action Forex, the 21 principal candlestick types should be used in combination with other trend indicators. Candlesticks provide a technical analysis of the market, and used alone, are not enough as economic indicators and trading fundamentals are critical elements for market fluctuations. A green candlestick represents a bullish market while red indicates a bearish market.
Long and Short Periods
Long periods have a long candlestick body with very short shadows at one or both ends. The short shadow indicates the market was one-directional during that time period. Short candlestick bodies indicate very little price movement between the opening and closing prices during that trading period. Short shadows are at either end of the body during a short period.
The green and red Marubozu are long candlestick bodies with no shadows at the ends. A Marubozu means the low price was at the market open and the high price was at the market close. This indicates continuing or a reversal of trends.
Doji sticks have the same open and close price. A bold horizontal line shows no color and the shadows show four different indicators. A Long-Legged Doji has a long shadow at both the top and bottom, indicating a great amount of fluctuation on both sides of the opening price. It is a good indicator of market indecision. A Dragonfly Doji has one long shadow at the bottom indicating a bearish trend reversal, which means the price should start moving upwards. A gravestone Doji, the opposite of a Dragonfly, has one long shadow at the top indicating a bullish trend reversal, and the price should move downwards. A 4-Price Doji is a bold horizontal line showing no color and no shadows. This Doji is rare and only happens when trading is suspended.
Stars and Raindrops
Stars are short candlesticks that appear above and between two long candlesticks. Raindrops are short candlesticks that appear below and between two long candlesticks. These are complicated patterns that require further analysis but usually indicate a reversal pattern.
Paper Umbrella and Spinning Top
A Paper Umbrella is a very short candlestick with a long shadow on the bottom. This is a strong reversal indicator of a bearish trend reversal for red and green. A red or green Spinning Top is a short bodied candlestick with shadows that are longer than the body. This candlestick indicates market indecision and no trend.
Hammer, Hanging Man and Inverted Hammer
Hammer candlesticks are very strong reversal trend indicators where the market is trying to hammer out a market bottom. A hammer only appears during a downward trend. A short body with a shadow on the bottom that is two to three times longer than the body is a good indicator of a bullish trend in the near future. A Hanging Man candlestick looks just like a Hammer candlestick, but it only appears during an upward trend and is a strong indicator of a bearish trend reversal. An Inverted Hammer is a short green candlestick with a very long shadow on top. This candlestick immediately follows a long red candlestick and only occurs at the bottom of a downward trend.
Engulfing, Harami and Harami Cross
A long green candlestick immediately following a shorter red one indicates a bullish trend. A long red candlestick immediately following a shorter green one indicates a bearish trend. Harami is the opposite of Engulfing. A Harami Cross is the combination of a Doji immediately following a long red or green candlestick, indicating a sustained directional trend.
Shooting Star and Shooting Star Doji
This bearish pattern occurs during an upward trend and appears as a short green candlestick with a long shadow on top. This candlestick immediately follows a long green candlestick. During a downward trend, a long red candlestick is followed by a Doji, indicating a bullish Doji Star. During an upward trend, a long green candlestick is followed by a Doji indicating a bearish Doji Star.
Piercing Line and Dark Cloud Cover
This indicator of a bullish trend reversal is a long green body immediately following a long red body and slightly lower than the red candlestick. Dark Cloud Cover indicates a bearish trend reversal with a long red candlestick following a long green one that is slightly lower than the red one.
Morning and Evening Star
A Morning Star indicates a bullish trend reversal and consists of a long red candlestick during a downward trend, a short green star much lower than the red one and a long green candlestick that confirms the reversal. This configuration appears during a downward trend. An Evening Star is the opposite of Morning Star in color and configuration and appears during a downward trend.
Morning and Evening Doji Star
A Morning Doji Star occurs after a downward trend. The configuration consists of a long red candlestick followed by a Doji lower than the red and long green stick following the Doji. The green stick confirms a trend reversal. The Evening Doji Star is the opposite of the Morning Doji Star in color and configuration, occurring during an upward trend and indicating a reversal.
- investment image by Kit Wai Chan from Fotolia.com