Introduction To Candlestick
In investing in stocks, there are two types of analysis commonly used by investors, namely fundamental analysis and technical analysis. So in this article we will discuss one of them, namely technical analysis. In technical analysis, there is one tool commonly used to assess stock price movements, namely stock price chart analysis. This stock price chart analysis can use various types of charts, ranging from line charts, bar charts, and of course candlestick charts.
A candlestick is a type of stock price chart used in technical analysis that shows the high, low, open, and close of a stock over a period of time.
A bit of a throwback, this candlestick was once a tool used by rice commodity traders in Japan to record market prices from time to time and use that data to predict future price movements. This method was developed by a rice commodity trader in the 18th century in Japan, Munehisa Honma, and subsequently this method was popularized in the western world by Steven Nison through his book entitled “Japanese Candlestick Charting Techniques”.
Candlesticks that are currently used as technical analysis in the stock market have two main components that you need to know, namely:
Candle Body (Body): part of the candlestick that shows the opening price and closing price at a certain point in time which is indicated by a red or green rectangle; or black or white.
Candle tail (Shadow/Wick): the section that shows the high and low prices of the stock at a given point in time, which is indicated by a straight line that runs above and below the body of the candlestick and is the same color as the shape of the candle (candle).
In addition to the main components of the candlestick, there are two colors used in the candlestick, namely red and green. Red means there is a decline in stock prices (bearish) which means the closing price is lower than the opening price. While the green color means an increase in stock prices (bullish) which means the closing price is higher than the opening price. But in some cases, if the candlestick displayed is colorless, then black is used to indicate a bearish situation, while white is used to indicate a bullish situation.
Candlestick: Bullish and Bearish
In addition to shape and color, the meaning of each candlestick also depends on the length and shortness of the body and tail of the candle. For example, in general, the longer the body of the candle, the stronger the buying and selling pressure of the stock. On the other hand, the shorter the body of the candle, it indicates minimal price movement and represents the consolidation of the stock price.
Candlestick with long shadow
Similar to the length and shortness of the candle body, the length and shortness of the candle’s tail also has its own meaning. In general, candlesticks with short tails indicate that most of the trading activity that occurs is near the opening and closing prices or in other words, stock price fluctuations are not far beyond the opening and closing prices. On the other hand, candlesticks with long tails indicate that some activity/trading deals far exceeded the opening and closing prices at a given point in time.
but what if the candlestick has a long upper tail and a short lower tail or vice versa? Good question. In this case, a candlestick that has a long upper tail and a short lower tail indicates that buyers dominate the trading session by bidding high prices, while sellers are trying to push prices lower than that price. On the other hand, a candlestick with a short upper tail and a long lower tail indicates that sellers dominated the trading session and pushed the price down, but buyers still exerted pressure by bidding high prices in the trading session.
Doji and Marubozu Candlestick
In addition, what about candlesticks that have a very short body that resembles a straight line? this case is referred to as a doji. Doji is a type of candlestick which means the opening price and closing price are at the same level. In addition to doji, there is also what is called a marubozu. Marubozu is a type of candlestick that has no tail. This means that the highest price and the lowest price of the stock price at a certain time period are described by the opening price and closing price of the stock.
Now you understand a little about the components and meaning of a candlestick. But you need to note, if the candlestick analysis is not only done by analyzing the existing candlesticks one by one. That is, you have to analyze not only from components, but also from two or more candlestick patterns on a chart. Well, next time we will discuss in more depth about various types of candlestick patterns, pal! Wait and watch…
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