Candlesticks

Candlesticks can really tell a story! Before we delve into its analysis we need to understand what candlesticks are. A little bit of history: candlesticks methodology developed in Osaka, Japan in the 17th century when Rice Exchange institutionalized. At first, candlestick technique was employed as an extensive military terminology, same as in battle is investing, and it requires the same tactical abilities to win. The investor has to prepare for trading as a general prepares for battle. After 1710, actual rice trading expanded into issuance and negotiation for rice called rice coupons, which were an early form of futures. Rice coupons became an actively traded entity. This institution became the world's first futures exchange.

Candlestick analysis developed over the years simply due to the tracking of rice price movements. However, in the mid-17th century a person named 'Munehisa Homma', a son of family dynasty in business, became a legend by elevating analysis of historical prices using candlesticks. First, he started at the Osaka rice exchange then, to make a greater fortune he traded in the Tokyo exchanges with a great success. Mr. Homma laid the foundations to what called now candlesticks analysis.

Without entering to the Japanese names for the candlesticks forms, we will discuss what they are implying after that you will be the judge of what to do with each candlestick formation.

Candlestick is a form of body with the squared shape and the cords above and or below the squared shape. The body represents the difference between the open and close price.

The cords represent the difference between the high or low and the open or close, and also represents the market participant's price disagreement. The white (green) body represents that closing price is higher than the opening price.  A black (red) body represents that closing price is lower than the opening price. Therefore, a white candlestick is positive and black candlestick is negative, and you need to discern that if the candlestick is white it does not mean that the financial instrument has closed in the positive territory.

Furthermore, we will see various body shapes and discuss what are their meanings. We use candlesticks and volumes to analyze current prices state, from my experience a combination of candlesticks and volumes leads to a rather accurate price demeanor analysis.
All of the above candlestick analyses make sense only if they are accompanied with relatively high volume, say about 25% higher than 14 days average. The A's candlesticks are called 'long day', white or black. Long days usually happens when 'dip pockets' called the institutions, or, news brought to some of market participants attention and drive them to a massive buy or sell at any reasonable price. A long white candlestick means the price started at the low of the day and reached to its highest point of the day. A long black candlestick means the price started at the high of the day and reached to its lowest point of the day. The longer the day and higher the volume means, the following days probably will continue in the same direction.

The exception is that a long day larger than about four times of its daily standard deviation should be viewed with suspicion.

The reasons for that could be:
1.  The company is about to sell itself or a division so that it is a fix price and market participants already priced the news in.

2. An earnings report came out and again a market participant already priced the news in. This exception is crucial because after that long day nothing will happen after and the price will stay stable, although for the options trader sake this is also good news, because of possibilities to plan strategies  according to this particular situation.

The B's usually appear in a middle of a trend of course accompanied by high volume that confirms a trend continuation. The cords above and below the candlestick show market participants highs and lows non-acceptance although they still agree on the direction. Price reached to its high of the day and recoiled to the closing price (if it is a white candlestick) or its day opening (if it is a black candlestick). Then it retreated to the low of the day and rebounded to the opening of the day (if it is a white candlestick) or the close of the day (if it is a black candlestick).

The H's are the hammers because of their shape. The hammers shape, upper side is the body and the lower side is the cord and its length, more than double than its upper body. Mostly hammers are a sign of a trend reversal, especially when they come after a relatively log downtrend; usually, it does not matter whether the hammer is black or white. Downtrend is generally steeper than uptrend, which leads traders to an extreme panic reaction, especially at the end of the trend. At this typical point, the sagacious trader awaits for the right entering price to collect the stocks remainder. These sellers are people that could not tolerate the pain of losing more money. Then the outcome, at the same day, the price recoils back up and forms a hammer formation.