Technical Analysis: Charts & Candlesticks

Types of Charts

There are three main types of charts used in trading. Each displays price data differently and has its own advantages.

1. Line Chart

The simplest chart type, showing only the closing price over time. A continuous line connects each closing price, creating a clean view of the overall trend.

• Best for: Quick trend identification
• Limitation: Hides price action within each period

2. Bar Chart (OHLC)

Shows Open, High, Low, and Close (OHLC) for each time period as a vertical bar with small horizontal lines indicating open (left) and close (right).

3. Candlestick Chart

The most popular chart type among traders. Like bar charts, candlesticks show OHLC data but in a more visual format with colored "bodies" that make patterns easier to identify.

Anatomy of a Candlestick

Each candlestick represents price movement during a specific time period (1 minute, 1 hour, 1 day, etc.). Understanding each part is essential for analysis.

Single Candlestick Patterns

Individual candlesticks can provide important signals about market sentiment. Here are the most important single-candle patterns to recognize:

Doji

A candle where open and close are nearly identical, forming a cross or plus sign. Indicates indecision in the market and potential reversal.

Hammer & Hanging Man

Small body at the top with a long lower wick (at least 2x the body). The name depends on location:

• Hammer: Appears after a downtrend - bullish reversal signal
• Hanging Man: Appears after an uptrend - bearish reversal signal

Inverted Hammer & Shooting Star

Small body at the bottom with a long upper wick:

• Inverted Hammer: After downtrend - potential bullish reversal
• Shooting Star: After uptrend - bearish reversal signal

Marubozu

A candle with no wicks (or very small ones). The body represents the entire range. Shows strong conviction in one direction.

• Bullish Marubozu: Green candle with no wicks - strong buying pressure
• Bearish Marubozu: Red candle with no wicks - strong selling pressure

Multi-Candlestick Patterns

These patterns consist of two or more candles and often provide stronger signals than single-candle patterns.

Engulfing Pattern

A two-candle pattern where the second candle completely "engulfs" the body of the first candle.

• Bullish Engulfing: Small red candle followed by larger green candle - reversal to uptrend
• Bearish Engulfing: Small green candle followed by larger red candle - reversal to downtrend

Morning Star & Evening Star

Three-candle reversal patterns:

• Morning Star: Large red → Small body (any color) → Large green = Bullish reversal
• Evening Star: Large green → Small body → Large red = Bearish reversal

Three White Soldiers & Three Black Crows

• Three White Soldiers: Three consecutive large green candles - strong bullish signal
• Three Black Crows: Three consecutive large red candles - strong bearish signal

Understanding Timeframes

The timeframe determines how much price data each candle represents. Different timeframes serve different purposes.

Multi-Timeframe Analysis

Professional traders use multiple timeframes together:

1. Higher timeframe: Identify the overall trend direction
2. Medium timeframe: Find key support/resistance levels
3. Lower timeframe: Time your entry precisely

Volume Analysis

Volume shows how many units were traded during each period. It's often displayed as bars below the price chart and provides crucial context for price movements.

Key Volume Principles

• Volume confirms trends: Rising prices with rising volume = healthy uptrend
• Declining volume in trends: May signal weakening momentum
• Volume spikes: Often occur at turning points (tops and bottoms)
• Breakouts need volume: A breakout without volume increase is suspect