JAPANESE CANDLESTICK CHART

This blog is a continuation of my previous blog FIRST STEPS FOR INVESTING IN SHARE MARKET
In the previous blog, we covered a part of Technical Analysis which included the study of market trends. In this blog, we will cover the reading of Japanese Candlestick Charts.
Every line graph in the stock market is also represented as a Japanese Candlestick Chart. This chart looks something like the following image:

 
These candles can be formed manually with the help of the Opening Price and Closing Price (which helps to construct the body of the candle) along with the highest and the lowest price in the market for the particular period (which are shown as extension lines of the candles). However, there are inbuilt systems to convert line graph into Japanese Candlestick Charts and hence there is no need to prepare the chart manually.
For reading a Japanese Candlestick Chart, it is important to know the types of candlesticks. There are more than 300 types of candlesticks. However, there are a few major types which are widely used in the Indian Stock Market.
Color, Size, Shape, and Location are the four characteristics of candles in which all the major types of candles lie.
COLOR
A green colored candle indicates the Closing Price is higher than the Opening Price whereas a red colored candle indicates the Closing Price is lower than the Opening Price.
SIZE
Size indicates the identification of a candle on the basis of its body.

• LRC (Long Range Candle)

When you see an LRC on the price chart there is a high chance of market going up or the bulls are on a win (if the LRC is green) and of the market going down or the bears are on a win (if the LRC is red).

• SRC (Short Range Candle)

When you see SRC on the price chart, bulls and bears (buyers and sellers) are fighting and hence there is a lot of confusion in the market. Here, the color of the candle makes no difference.
SHAPE

• Hammer

When you see a hammer on the price chart, it means that there is a huge demand in the market and hence it is anticipated that the market will go up like a rocket. It is a trend reversal indication.

• Inverted Hammer or Shooting Star

When you see an inverted hammer, it indicates there is a huge supply and hence the market is anticipated to go down. Here it is to be noted that the color of this hammer has no significance, the meaning is the same. It is also a trend reversal indication.

• Spinning top and Doji

 
LOCATION

• A Hammer is usually seen at the bottom of the chart
• An Inverse Hammer is usually seen at the top of the chart.
• When is the market is falling down and a Spinning Top or Doji is seen, there is a lower chance of price going high because people think twice before investing.
• When the market is going up and there is confusion at the top, there is a higher chance of market going down because people fear loss. Thus, Dogi or Spinning top at the top is a strong trend reversal indication.

Apart from the above types, there are a few more types which are equally important. They are known as
DOUBLE CANDLESTICK PATTERNS

• Engulfing pattern

• Harami

• Piercing Pattern

 
This is a part of Technical Analysis which has to be done before investing and also after you have invested.
In order to minimize your loss, always gather knowledge first. Know the company’s business before investing. Do not depend completely on Technical Analysis to invest, Fundamental Analysis of the company and the sector is equally important. 
By Ria Vaghela (student at Narsee Monjee College of Commerce and Economics)