candlestick_patterns [CapiPedia]

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======Candlestick Patterns======
Candlestick Patterns are a visual tool used in [[technical analysis]] to chart and interpret the [[price movement]] of a [[security]], like a stock or bond. Originating from 18th-century Japanese rice traders, most notably [[Munehisa Homma]], these charts offer a more intuitive and information-rich alternative to simple line graphs. Each "candlestick" represents the price action over a specific period—be it a day, an hour, or even a minute. By displaying the open, high, low, and close prices, candlesticks provide a quick snapshot of the battle between buyers (bulls) and sellers (bears). When these individual candles form recognizable sequences, or patterns, some traders believe they can predict future price direction. For a value investor, while not a primary tool, understanding these patterns can offer valuable insights into [[market sentiment]] and the psychology driving short-term price fluctuations.
===== Reading a Single Candlestick =====
To decipher the patterns, you first need to understand the language of a single candle. Each one tells a story with two main parts.
==== The Body ====
The thick, rectangular part of the candlestick is called the "real body." It represents the range between the opening and closing price for the period.
  * A **green (or white) body** means the closing price was //higher// than the opening price. Bulls were in control!
  * A **red (or black) body** means the closing price was //lower// than the opening price. Bears won the day.
The size of the body also matters. A long body indicates strong buying or selling pressure, while a short body suggests little price movement and consolidation.
==== The Wicks (or Shadows) ====
The thin lines extending above and below the body are the wicks (also called shadows or tails).
  * The **upper wick** shows the //highest// price the security traded at during the period.
  * The **lower wick** shows the //lowest// price it traded at.
Long wicks suggest that prices fluctuated significantly during the period before closing near the open, indicating a battle between buyers and sellers that ended in a stalemate.
===== Common Candlestick Patterns =====
Patterns are formed by one or more candlesticks and are typically classified as bullish (indicating a potential price rise), bearish (indicating a potential price fall), or neutral. Here are a few famous examples.
=== Bullish Patterns ===
These patterns suggest that an uptrend may be starting or continuing.
  * **Hammer:** A single candle with a short body, little to no upper wick, and a long lower wick. It looks like a hammer and often appears after a price decline, suggesting that buyers stepped in to push prices back up from their lows.
  * **Bullish Engulfing:** A two-candle pattern where a small red candle is followed by a large green candle whose body completely "engulfs" the previous red candle's body. It signals a powerful shift from selling to buying pressure.
=== Bearish Patterns ===
These patterns warn that a downtrend might be on the horizon.
  * **Shooting Star:** The opposite of a hammer. It has a short body, a long upper wick, and little to no lower wick. It typically appears after an uptrend and suggests that sellers overpowered buyers, pushing the price down from its highs.
  * **Bearish Engulfing:** The evil twin of the bullish version. A small green candle is followed by a large red candle that completely engulfs it, signaling a potential reversal to the downside.
=== Reversal/Indecision Patterns ===
  * **Doji:** This is a special candle where the open and close prices are virtually identical, resulting in a very thin (or nonexistent) body. It resembles a cross or plus sign and signals indecision. Neither buyers nor sellers could gain control. It often precedes a trend reversal.
===== A Value Investor's Perspective on Candlesticks =====
Let's be clear: As a value investor, your decisions should be rooted in [[fundamental analysis]]—understanding a business's health, its competitive advantages, and its [[intrinsic value]]. You buy great companies at fair prices, not by reading the tea leaves of a price chart.
However, dismissing candlestick patterns entirely is like ignoring the emotional state of the person you're negotiating with. In the market, that person is the famously manic-depressive [[Mr. Market]], and his mood swings create opportunities. Candlesticks are a fantastic gauge of his current mood.
Think of it this way: Your deep research identifies a wonderful company that is significantly undervalued. You've decided to buy. Now, looking at the chart, you see a "Hammer" or a "Bullish Engulfing" pattern forming after a long price decline. This could be a signal that Mr. Market's pessimism is finally exhausting itself. Using this pattern as a trigger for your //already-justified// purchase can help improve your entry point, potentially preventing you from buying just before one last stomach-churning drop.
**Bottom Line:** For the value investor, candlestick patterns are not a crystal ball. They are a supplementary tool for gauging market sentiment and refining the timing of your entry and exit points. Always let fundamental value lead the way; let the candles simply light the path.