What are candlestick patterns and how to use them to trade stocks? - part 1


What are candlestick patterns and how to use them to trade stocks?

 Candlestick pattern, in simple words, is a method of technical analysis wherein the candlestick chart shows the stock price movement in the form of a graph and this pattern can be used to predict the future price movement in stocks. Now, this series is going to be for all the beginner traders as well and therefore, I will be starting off from the very basics.

There are 4 main parts to see in a candlestick:

  • Open: This is the price at which the trading session opens.
  • High: This is the highest price that the stock touches during the session.
  • Low: This is the lowest price that the stock touches in the session.
  • Close: This is the price that the stock reaches when the trading session ends.
Note: Session can change depending on the graph you are seeing, it can be an hour or a day etc.

You will usually find two colours in candlestick:
  • Green: A green bar is called a bullish bar and represents that the price has closed higher for the session.
  • Red: A red bar is called a bearish bar and represents that the price has closed lower for the session.
What are the components that form part of candlestick:
  • The Body: The body of the candlestick tells you who is in control of the prices, the buyers or the sellers. The bigger the body, the bigger the control by one of the parties, the buyer or the seller.
  • The Wick: The wick of the candlestick tells you whether there is a price rejection by buyer or seller and what is the intensity of that rejection.
Now, we are going to look at all these components together in a candlestick:



The thin top and bottom are called wick, the green part is called the body. The starting point of body i.e. point A is the open price, the closing point of the body i.e. point B is called the closing price. The tip of the wick i.e. point C is called the highest price reached during the session and the bottom of the wick i.e. point D is the lowest price reached during the session. Since the bar is green it is a bullish bar and there is an increment in stock price during the session.


Let us take a look at the below candlesticks:



Notice in figure A, the candlestick is green and therefore, you can say that the buyers are in strong control as they increased the price from A to B and with a very weak price rejection the final closing price is C. There are high chances for stock price to further increase in the next trading session.

In figure B, however, the body shows that the weak buyers are in control, there is still an increment in price, however there is a strong price rejection by the sellers which is evident from the fact that prices increased till point B and then dropped back to point C.

I hope candlesticks are making more sense to you now and by the end of these series of posts you will be fully comfortable with them. This was the part 1 of the candle stick pattern, part 2 coming on Thursday.

Thanks for reading!

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Comment on any query you had like me to address.

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