Stock market trading: Most important things to know about candlesticks; patterns, what they represent, indications about price change and more

The stock market comes with its set of risks for investors and traders as well. But there are ways to avert those risks and maximizing profits at the same time. One of the ways to evaluate appropriate investment and trading opportunities is to identify the price trends and patterns through technical analysis. It is an integral part of stock trading, wherein the trader predicts the direction of prices based on past market data, primarily price and volume. Numerous patterns are analysed before putting the money in any stock. One of the patterns in technical analysis is called candlesticks. Anish Singh Thakur, CEO of Booming Bulls Academy, shares his knowledge on the most important things to know about candlesticks in stock market trading:-

Explaining what is a candlesticks chart/analysis, Anish Singh Thakur said, "Easy to read and understand, Candlesticks is one of the most popular charts among traders as it represents the price movement of a stock over a certain period of time. Candlesticks help analyse and understand the psychology of the market. Invented in the 18th century by a Japanese businessman, Munehisa Homma, to analyse the price of rice, the candlesticks analysing charts helped Homma boost profits after he identified certain patterns. He had placed the link between price and supply and demand of rice. He concluded that the emotions of traders strongly influenced markets. Candlesticks show the same emotion through price movements. The method enables showcasing complicated information in a simplified manner."

About the anatomy of candlestick chart, Anish Singh Thakur explained, "There’s a positive candlestick in green and a negative in red with a body and wicks or shadows in the chart. Wicks/shadows are thin lines extending above and below the body. A green candlestick means the closing price is more than the opening price, while a red candlestick means the closing price is less than the opening price. The space between the opening and closing points is called the body. Also, the top of the upper wick shows the high, and the bottom of the lower wick shows the low." 

"By now, we know that the candlestick charts show the open, close, high and low prices of the stock for a specific period of time. The trader can fix the time frame as per the requirement. The trader can evaluate four major price movements of the stock by using the chart. However, it must be noted that the candlestick cannot be observed in isolation. The trader has to take into consideration the past patterns for the analysis. The previous charts help conclude the changes over time. While analysing the charts, a trader must ask a few questions, such as how the candlestick’s body has changed or whether the shadows have become larger or smaller. The larger candlestick body means an increase in momentum. The body shows the change in the price of a stock over a period of time," Anish Singh Thakur added.

Describing types of candlestick pattern, Thakur said, "We know what candlestick looks like and what they represent, but different candlestick patterns indicate various signals or indications regarding price change, trends, etc. The important candlestick patterns are Doji, Hammer, Hanging, Bullish Engulfing, Bearish Engulfing, Morning star and Evening star. Even though candlesticks can be used to determine trends for trading stocks, commodities, currencies or ETF's but it is not enough. For a master trade strategy, one needs a combination of technical concepts.  "
  
"Candlestick is one of the most important charting style used to analyse and understand the psychology of the market participants.Green candlestick indicates bullishness whereas red candlestick indicates bearishness in the market also, different candlesticks represent various signals regarding price and trends and by using those signals trades can be initiated," concludes Thakur.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)