Candlestick Analysis is a concept used in the field of technical analysis which attempts to determine changes in the direction of the price of a security. A Candlestick or Japanese Candlestick is a chart that is used to display the high, low, opening and closing prices for a security for a single time period – the most used time period being one day.
Technical Analysts search for patterns in the candlestick charts to ascertain the direction the price of the security is likely to move. There are a large number of candlestick patterns that can divided into simple and complex patterns. When using candlestick analysis a trader will have to know each pattern and what this pattern represents for the price trajectory of the security. One simple pattern is known as a Doji – it represents indecision and is formed when opening and closing prices are essentially the same. A more complex pattern is the Bullish Engulfing Pattern seen below.
While this method of technical analysis can be very useful in predicting the future direction the price of a security is likely to move, it is however be open to subjective bias and one’s own interpretation. At first the idea behind finding these patterns seems relatively straightforward, but it is not always easy to determine the exact pattern which has just occurred. Furthermore candlestick analysis does not specify the exact price at which to enter or exit a trade. Therefore having a complete trading strategy is paramount to the success of any trader who practices this method of security analysis.