Candlesticks

The above diagram has three examples of bullish candlesticks. The first is the weakest, despite having an identical range to other two. It is weakest because the body is narrow relative to the total range and also to the other two candlesticks.

Spinning Top

A small body and long tails, whether higher, lower or at both ends of the candle can be referred to as a Spinning Top and represents a degree of indecision, uncertainty in the market, a definite question over direction. If it occurs during a trend it may be signalling the end of a trend. If it occurs during a sideways market it could be signalling the start of a trend.

The centre candlestick is there as a reference to the norm. It is, for reference sake, a normal balanced, candlestick, reflecting a directional market, in this case up.

The last candlestick is quite unique and has its own name, Marubozu. It indicates, in this case, a strong up day. A filled body would indicate a strong day down. The lack of a tail either above or below suggests the dominant directional activity was prevalent during the whole session and therefore should continue into the next session. Of course this information should be seen in context. There will always be other information that should be taken into account, which might support or suppress that particular view.

Tails

Just as the body of the candlestick provides us with some information the tails also provide us with invaluable information about the activity that occurred during the session.

The mere presence of a tail suggests the opposite activity to its location. A higher tail reveals the presence of sellers and selling activity. A lower tail exposes the fact that buyers may be present. The length of the tail, relative to the body and the total range, gives some indication of the strength of the particular activity being reflected. A longer tail is more definitive than a short tail. A tail, high or low, signals that a move to the extreme for the day (high or low) has been countered by the opposite activity. The directional probe has been rejected.

The combinations of one long tail and one short tail or both short tails or both long tails have there own outcomes. If we use the logic that a tail represents the opposite activity to the direction of the probe and the length provides the degree of that activity, we can approximate a net result for the session.

Another layer of complexity can be added when the shadows for the session are examined with respect to the previous session. If the new candlestick is higher than the previous candlestick, the lower shadow would indicate greater strength than if it were a down day and below the range of the previous session.

In this case, where the current day is above the previous session the upper shadow, should be seen as normal activity with less strength than if it were occurring below the previous sessions range.



ASX Charting Course
Chapter 43 Candlestick Charting
Candlestick charts are a Japanese invention. They are simple to construct using the same information as a normal Western (open, high, low, close,) bar chart. Instead of using a single line however, the range is split, using a rectangle to represent the area between the high and the low. The rectangle or candle is left blank or a specific colour like green for an up day and filled or a different colour like red for a down day. The rectangle is called the body or the real body and the single lines at the top or the bottom, if they exist, are called shadows, wicks or tails.
Fig 67
As can be seen by the above diagram candlestick charts actually provide a quick, easy to interpret picture of the days action. Candlestick charting is best applied to daily charts, they can also be applied to weekly or month charts. A shorter time frame is not really recommended. Length of the Body The length of the body gives some indication as to the strength of a move within a session. A relatively long body will indicate a more aggressive move than a shorter body. This is both relative to the recent activity and the tails, which comprise the total range on the day.
Fig 68
The above diagram has three examples of bullish candlesticks. The first is the weakest, despite having an identical range to other two. It is weakest because the body is narrow relative to the total range and also to the other two candlesticks. Spinning Top A small body and long tails, whether higher, lower or at both ends of the candle can be referred to as a Spinning Top and represents a degree of indecision, uncertainty in the market, a definite question over direction. If it occurs during a trend it may be signalling the end of a trend. If it occurs during a sideways market it could be signalling the start of a trend. The centre candlestick is there as a reference to the norm. It is, for reference sake, a normal balanced, candlestick, reflecting a directional market, in this case up. The last candlestick is quite unique and has its own name, Marubozu. It indicates, in this case, a strong up day. A filled body would indicate a strong day down. The lack of a tail either above or below suggests the dominant directional activity was prevalent during the whole session and therefore should continue into the next session. Of course this information should be seen in context. There will always be other information that should be taken into account, which might support or suppress that particular view. Tails Just as the body of the candlestick provides us with some information the tails also provide us with invaluable information about the activity that occurred during the session. The mere presence of a tail suggests the opposite activity to its location. A higher tail reveals the presence of sellers and selling activity. A lower tail exposes the fact that buyers may be present. The length of the tail, relative to the body and the total range, gives some indication of the strength of the particular activity being reflected. A longer tail is more definitive than a short tail. A tail, high or low, signals that a move to the extreme for the day (high or low) has been countered by the opposite activity. The directional probe has been rejected. The combinations of one long tail and one short tail or both short tails or both long tails have there own outcomes. If we use the logic that a tail represents the opposite activity to the direction of the probe and the length provides the degree of that activity, we can approximate a net result for the session. Another layer of complexity can be added when the shadows for the session are examined with respect to the previous session. If the new candlestick is higher than the previous candlestick, the lower shadow would indicate greater strength than if it were a down day and below the range of the previous session. In this case, where the current day is above the previous session the upper shadow, should be seen as normal activity with less strength than if it were occurring below the previous sessions range.
Fig 69
The chart above is a typical sample of market activity prepared using candlesticks. You will notice that during the trending section each new body tends to lie wholly outside and, in the case of this bull market trend, above the previous candlestick body. Also worth noting is the length of the bodies at the beginning of the trend, at the end of October. They are quite large when compared to the average body length over the whole sample.
Craig MacLean is a Futures Adviser Licensed under the Australian Securities Commission, Corporations Law. The writer accepts no responsibility for any losses incurred from any action or inaction derived from the advice in this report.

ASX Charting Course

Chapter 43

Candlestick Charting

Length of the Body

Spinning Top

Tails