Candlestick chart explained

Candlestick charts are a visual representation of price movements over a specific time period, usually minutes, hours, days, or weeks. Each individual data point on the chart is represented by a candlestick, consisting of a body and two wicks (also known as shadows or tails).

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The body of the candlestick is rectangular, and its colour provides information about the price movement during that period.

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Interpreting the Candlestick Colours

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Bullish Candlesticks (Green/White)

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The top of the body represents the closing price, while the bottom represents the opening price. When the closing price is higher than the opening price, the candlestick is green or white, indicating a bullish (positive) market sentiment. The longer the body, the stronger the buying pressure.

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Bearish Candlesticks (Red/Black)

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The top of the body represents the opening price, while the bottom represents the closing price. When the closing price is lower than the opening price, the candlestick is red or black, indicating a bearish (negative) market sentiment. The longer the body, the stronger the selling pressure.

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Interpreting Candlestick Patterns

Beyond individual candlesticks, the real power of candlestick charts lies in identifying patterns formed by multiple candlesticks.

Some common patterns include:

Engulfing Pattern: A bullish engulfing pattern occurs when a small bearish candlestick is followed by a larger bullish candlestick that engulfs it completely. A bearish engulfing pattern is the opposite, with a small bullish candlestick followed by a larger bearish candlestick. These patterns often indicate potential trend reversals.

Doji: A doji occurs when the opening and closing prices are very close or identical, resulting in a small-bodied candlestick with long wicks. Dojis suggest indecision in the market and may signal an upcoming reversal or trend continuation, depending on their placement in the chart.

Hammer and Hanging Man: These patterns consist of small bodies with long lower wicks (hammer) or long upper wicks (hanging man). Hammers are considered bullish reversal signals, while hanging men are bearish reversals.

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Candlestick charts are a valuable tool for traders and investors seeking to gain insights into market sentiment and potential price movements. By mastering the art of reading candlestick patterns, one can make more informed decisions, improve market timing, and enhance their overall trading strategies.