Candlesticks were developed by a Japanese man called Munehisa Homma, a rice futures trader at around 1700. Exactly, this is more than 300 years old and still works pretty well.
Candlesticks are not to be used alone, but with some simple combinations such as candlesticks and pivot points or Fibonacci retracements you can greatly magnify the results of your trades. As always this will involve money management and discipline.
Formation of a candlestick
The formation of a Candlestick consists of several information on the prices such as the open, close, high and low. That’s what a candlestick is, a graphic representation of this information. The top and the bottom of the candlesticks are the high and low respectively. The hollow or full, also represented by colours such as green and red or others are known as the real body. The real body is where the market opened and closed and as in these cases the white one have the beginning of the real body where it opens and close the real body where it finishes, the opposite stands for the black one.
Candlesticks with long shadows up and down and relatively small bodies.
This pattern indicates indecision and if it is in the end a trend up or down, independent of the color of the candle it could mean there will be a reversal, wait for confirmation before action.
Candlesticks with a long upper shadow and a shorter lower shadow represents the buyers will to drive prices up but with sellers coming and dropping the price for a lower close. In the other hand, candlesticks with a bigger low shadow and a smaller upper shadow indicates that sellers dominated the session driving prices high, but ultimately the buyers prevailed and the price closed on a higher point.
Dojis are formed when the open and close prices are the same or almost the same. The Doji should have a very small body, pretty much like a line.
A perfect Doji indicates a indecision in the market and if they are formed after a series of candle sticks with long full bodies it means that the direction is loosing its strength, with a possible reversal.
Long leged Doji
The Long Leged Doji Candlestick represents a indecision of the market. The price has gone up and down but bulls and bears finalized the battle in the middle. It can also be a reversal pattern, specially on tops. From my experience you really should get a confirmation from this after the Long Leged Doji, as indecision is not a good indicative at all.
A Dragon Fly is a Doji with the same open, high and close prices but with a low price far from it. Leaving a long shadow down. A Dragon Fly Doji looks just like a “T” This means that sellers had a strong activity but in the end buyers prevailed and then closed at a high price.
After a long up trend or at a resistance a Dragon Fly Doji can mean a bearish reversal or a top. After a long down trend or a support a Dragon Fly Doji can mean a bullish reversal or a bottom.
Gravestone Doji is formed when the open, low and close are virtually the same with the high price creating a long shadow upwards. A Gravestone Doji looks pretty much like an inverted “T”
After a long down trend or after a long black candle or at a support a Gravestone Doji can indicates a bullish reversal. After a long uptrend or a long white candle or at a resistance the Gravestone Doji could indicate a bearish reversal. Dojis always request a confirmation for extra security.
Trend + Doji
A Doji by itself doesn’t mean much, but after a trend with long candles it indicates that the trend is losing force. If it is preceded by white candles it means that the buy force is losing its strength and that sellers are becoming stronger. In other words it might indicate a reversal, although it is recommended to wait for the next candle to confirm that, as a Doji means more than anything a indecision, not necessarily a reversal.
Hammer and Hanging Man
This two figures look pretty much the same, with a long body and a long lower shadows and small or inexistent upper shadows. Even though they look the same they have completely different meanings depending on previous candles.
The Hammer and The Hanging Man Patterns
The hammer is a bullish reversal pattern that forms on a downtrend. Being a reversal formation the hammer can also be a bottom or a support level. The appearance of the hammer by itself does not confirm the reversal, you should wait for the appearance of a long white candle, also if the next price opens on a gap upwards it is a good confirmation.
The hanging man is a bearish reversal pattern that forms after a upwards movement on the prices. It also can be a top or a resistance level. As with the Hammer, Hanging Man needs a confirmation such as a black candle or a downwards gap.
Inverted Hammer and Shooting Star
The Inverted Hammer and the Shooting Star once again look the same, and its meaning is going to depend on previous prices movements.
The Inverted Hammer forms after a decline on prices. Inverted Hammers could be after the confirmation a trend reversal upwards or a support level.
The shooting star is a bearish reversal pattern that forms after a upwards movement in prices. A Shooting Star can mark a potential trend reversal or resistance level.