SECURITY ANALYSIS AND PORTFOLIO

MANAGEMENT

SEMINAR ON

CANDLESTICK CHART

BY
ANANTHU K. JAYAN
CONTENT
 Introduction
 Candlestick Chart
 Characteristics, Advantages & Disadvantages
 Major Candle Stick Chart Patterns
 Conclusion
Introduction
A candlestick chart (also called Japanese candlestick chart) is a
style of financial chart used to describe price movements of
a security, derivative, or currency. Each "candlestick" typically
shows one day, thus a one-month chart may show the 20 trading
days as 20 candle sticks. Just like a bar chart, a daily
candlestick shows the market's open, high, low, and close price
for the day. The candlestick has a wide part, which is called the
"real body." This real body represents the price range between
the open and close of that day's trading. When the real body is
filled in or black, it means the close was lower than the open. If
the real body is empty, it means the close was higher than the
open.
Candlestick Chart
 Many algorithms are based on the same price information shown in
candlestick charts.
 Trading is often dictated by emotion, which can be read in candlestick
charts.
 Candlestick charts are most often used in technical analysis of equity
and currency price patterns.
 They are visually similar to box plots, though box plots show different
information
Charateristics of CC
 Candlestick charts are used by
traders to determine possible price
movement based on past patterns.
 Candlesticks are useful when
trading as they show four price
points (open, close, high, and low)
throughout the period of time the
trader specifies.
 The body, which represents the
open-to-close range
 The wick, or shadow, that indicates
the intra-day high and low
 The color, which reveals the
direction of market movement – a
green (or white) body indicates a Figure 1.1(a)
price increase, while a red (or
black) body shows a price decrease
Candlestick

Fig.1.1(b)
Benefits of Candle stick Chart
 Candlestick charts are one of the most common tools traders use for
technical analysis.
 Determine the current state of the market at a glance.
Just by looking at the color and length of a candlestick.
 See the direction of the market more easily.
 The color and shape of the candlestick can help traders to determine if
an uptrend is part of bullish momentum or simply a bearish spike.
 Identify market patterns quickly.
 It display specific bullish and bearish reversal patterns that cannot be
seen on other charts.
Limitations
 It doesn't tell you how the price move.
 It doesn't tell you the big picture.
 Gap
Major Candlestick Chart Patterns
 Long Verses Short Body
 Marubozu

 Long Verses Short Shadows

 Spinning tops

 Doji

1. Neutra Doji
2. Long Legged Doji
3. Grave Stone Doji
4. Dragon Fly Doji
 Bull Verses Bears

 Harami Position

 Hanger and Hanging Man

 Inverted and Shooting Star

 Morning and Evening Star

Long Bodies Short Bodies

 As long as the body, there will be  The short candlesticks indicate little
high pressure in buying and selling price movement and represent
of securities. consolidation.
 If the white candlestick is longer, it  It also lead towards a loss in
shows the price of the security is investment.
higher than opening in closing time.  Indicates to take preventive
 It states that the buyers where measure from suffering loss.
aggressive.
 Informs in prior to sell the security
before is too late.
 Long white candlesticks are
generally bullish.
 If the black candlestick is longer, it
shows the price of the security is
lower than opening in closing time.
 It states that the sellers where
aggressive
Fig. 1.2
Long Vs Short Shadows

 Short Shadows indicates the most of

trading was confined near the close
and open prices.
 Long Shadows indicates the prices
extended well past the open and
close.
 The long upper shadows and short
lower shadows, states the buyer have
the influence over the price of
security.
 This contrast of strong high and weak
close resulted in a long upper shadow.
Fig.1.3
 The long lower shadows and short
upper shadows, states the sellers have
the influence over the price of
security.
Marubozu
 A long or a normal candlestick
(black or white) with no shadow or
tail.
 The high and the lows represent the
opening and the closing prices.
 Considered a continuation pattern.
 Buyer controlled the price from the
first trade to last.
 Black form when the open equals
the high & close equal the low
Fig. 1.4
Spinning Tops
 A black or a white candlestick with
a small body.
 These candlestick will have long
upper & lower shadows/wicks
 The size of shadows can vary.
 Interpreted as a neutral pattern but
gains importance when it is part of
other formations.
 Here neither the buyer nor the seller
could gain the upper hand
Fig.1.5
Doji

 Where a security's open and close

are virtually equal.
 The length of the upper and lower
shadows can vary, with the
resulting candlestick looking like
a cross, inverted cross or plus
sign.
 It convey a sense of indecision or
tug-of-war between buyers and
sellers.
 Prices move above and below the
opening level during the session, Fig. 1.6
but close at or near the opening
level.
 Types of Doji
Neutral Doji
 Where the open and close prices
are virtually equal.
 This pattern form when the buying
and selling activity is in
equilibrium.
Fig. 1.7
Long Legged Doji
 It reflects a great amount of
indecision about the future direction
of the asset.
 This pattern form when the supply
& demand forces are at
equilibrium.
 It have long upper and lower
shadows that are almost equal in
length.
 The stock traded will be above &
below the open price.
 But the close price will show a little
change compared to open price.
Gravestone Doji
 This candlestick looks like an
upside down “T” due to the lack of
a lower shadow.
 It indicate that buyers dominated
trading and drove prices higher
during the session.
 This patterns forms at a bottom of a
downtrend.
Fig. 1.8
Dragonfly Doji
 This candlestick looks like a “T”
due to the lack of an upper
shadow.
 It indicate that sellers dominated
trading and drove prices lower
during the session.
 The long lower shadow provides
evidence of buying pressure.
 This pattern forms at the peak of
the uptrend.
Bull Market
 Bull market is a phrase used to
describe an economic environment
that is growing & optimistic.
 It also describes about the growth
& stability.
 Here people's confidence are high
& will be buying more stock.
 Key indicators of bull market
I. High gross domestic product.
II. Rising stock prices
III. More long stock trading
IV. Low unemployment rates
Bear Market
 Bear market describes an
economic trend in which there is
pessimism about the market.
 Mainly about the stagnation or a
downward trend.
 Here people's confidence will be
low & will be interested in selling
of stock.
 Key indicators of Bear market
I. Loss of jobs
II. Market prices are falling.
III. More short stock trading
Bulls Verses Bears
 Bullish patterns indicate that the price is likely to rise.
 Bearish patterns indicate that the price is likely to fall.
 It depicts the battle between Bulls (buyers) and Bears (sellers) over a given
period of time.
 The bottom of the candlestick represents a touchdown for the Bears.
 The top a touchdown for the Bulls.
While there are many variations, I have narrowed the field to 6 types of games
(or candlesticks):
1. Long white candlesticks indicate that the Bulls controlled the ball
(trading) for most of the game.
2. Long black candlesticks indicate that the Bears controlled the ball
(trading) for most of the game.
3. Small candlesticks indicate that neither team could move the ball and
prices finished about where they started.
 Fig. 1.9
4. A long lower shadow indicates that the Bears controlled the ball for part
of the game, but lost control by the end and the Bulls made an impressive
comeback.
5. A long upper shadow indicates that the Bulls controlled the ball for part
of the game, but lost control by the end and the Bears made an
impressive comeback.
6. A long upper and lower shadow indicates that the both the Bears and the
Bulls had their moments during the game, but neither could put the other
away, resulting in a standoff.
Harami Position
 A candlestick that forms within the real body of the previous candlestick.
 The second candlestick is nestled inside the first.
 The first candlestick usually has a large real body and the second a smaller
real body than the first.
 Doji and spinning tops have small real bodies, meaning they can form in the
harami position as well.
 There are also several 2- and 3-candlestick patterns that utilize the harami
position.

Fig. 1.10
Hammer & Hanging man
 Both look exactly alike.
 But have different implications
based on the preceding price action.
 Both have small real bodies, long
lower shadows and short or non-
existent upper shadows. Fig. 1.11
 Hammer pattern is considered as a
bullish reversal pattern
 Hammer patterns forms in a down
trend.
 Hammer considered a market
bottom.
 Hanging pattern is form in a
uptrend.
 Hanging pattern considered as the
resistance or market peak. Fig. 1.12
Inverted Hammer & Shooting
Star
 IH is a reverse pattern of hammer
pattern.
 IH forms after a decline or
downtrend.
Fig.1.13
 The long upper shadow indicates
buying pressure during the
session in IH.
 IH patterns forms in a down trend
& considered as Market bottom.
 SS is a reverse pattern of IH.
 The open, close and low are near
to the low candle stick.
 SS pattern forms in uptrend &
considered as a market top.
Fig.1.14
Morning Star
 It is a reversal pattern & this is
considered a sign of hope in a
bleak market downtrend.
 It has 3 candles.
 It forms at bottom of downtrend.
 The 1st candle is any long &
bearish candle.
 The 2nd candle is small &
indecisive candle.
 The 3rd candle is long & bullish.
 It signals that the selling pressure
of the first day is subsiding, and a
bull market is on the horizon.
Evening Star
 It is same as reversal pattern like
morning star.
 It also have 3 candlesticks.
 It forms at the top of uptrend.
 The 1st candle is long and bullish.
 The 2nd candle is small &
indecisive.
 The 3rd candle is long & bearish.
 It indicates the reversal of an
uptrend, and is particularly strong
when the third candlestick erases
the gains of the first candle.
Morning Star Evening Star
Fig.1.15 Fig.1.16
Examples of Charts

Fig. 1.17
Fig. 1.18
Fig. 1.19
Fig. 1.20
Conclusion
 Throughout the study it is clear that each and every candlestick have
difference. Because of the following reasons:
i. There are different color and size of candle.
ii. They belong to mainly 2 group bullish or bearish.
iii. There are uptrend and downtrend.
iv. Buying pressure is also one of the reason.

In technical analysis, a candlestick pattern is a movement in prices shown

graphically on a candlestick chart that some believe can predict a
particular market movement. The recognition of the pattern is
subjective and programs that are used for charting have to rely on
predefined rules to match the pattern.