A robust decision making framework demands analytical approach which takes into the view the parameters, limitations and environment surrounding and including the problem universe. Similarly when it comes to any market – equities, forex, commodities – which has inherent component of speculation in it, Technical Analysis finds favour, at least among the traders (short term) , if not investors (long term).
Technical Analysis at a very crude level means analyzing and predicting market based on ‘historical data’ i.e. historical values of the underlying asset being analysed. Number of tools are available to perform technical analysis. One of them is CandleStick Pattern. In this article we are going to explore the basics of this 400 year old Japanese technique, invented by rice traders , to be followed by more comprehensive write up on “Patterns” formed by CandleStick charts in coming articles.
A single candlestick is used to depict the valuation data of an underlying asset (equities, forex, commodities) for a day. It is plotted against “Date” on a graph, this graph throws “patterns” formed by abutting candlesticks belonging to different dates which is used to deduce predictions.
A candlestick consists of four data –
- Opening price of the asset (O)
- Closing price of the asset (C)
- Highest price of the asset achieved in the day (H)
- Lowest price of the asset achieved in the day (L)
A candlestick consists of two parts –
- Body – “Broader” part of the candlestick. It depicts “O” at one end and “C” at other end.
- Shadow – “Thinner” part of the candlestick depicting “H” and “L” data of the asset.
“O” and “C” are plotted on the extreme ends of the “Body”, hence length of the Body is decided by the difference between the values of “O” and “C”. “H” and “L” form the two extremes of “Shadow” part.
Based on different combinations of “O”, “C” , “H” and “L” , there can be motley forms of candlestick.
Lets first consider variations based on values of “O” and “C” –
- C > O , represented by “White Body”
- O > C , represented by “Black body”
- C = O , represented by horizontal line in place of Body, also called Doji.
Candlesticks based on “Shadow”
White Morubozu – A white candle without any shadow on any side. It signifies very bullish market condition as bulls manage to close the markets on the same level as the highest valuation of the day. The fact that value didn’t go below the “O” also signifies that Bulls had a field day.
Black Morubozu – Complete opposite of the White Morubozu, it is formed when Bears rule the market and value closes at the lowest level achieved in the day and all valuations achieved during the day are below the Open Price.
Opening Morubozu – They denotes candles that do not have shadows attached to their “O” part of the body. Same as White Moruvozu, White Opening Morubozu also signifies Bullish trend but albeit of lesser intensity than white Moruvozu. Similarly Opening Morubozu with black body signifies bearish sentiment , but of lesser intensity than Black Morubozu.
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| Opening Morubozu |
Based on CandleStick’s size, position on the chart and relative placement (during uptrend or downtrend), predictions are made by the traders. Many traders also use them in consonance with other Technical Analysis tools like MDA, RSI etc. to strengthen their predictions.
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