A candlestick chart is a method of showing prices \u2014 namely open, high, low, and close \u2014 of an asset for a defined period. Candlestick charts are thought to have originated from Japanese rice traders in the 18th century. They are still one of the most popular ways of displaying prices of financial markets.<\/p>\n

Three of the most useful candlesticks for identifying a potential trend change or for gauging market sentiment are the \u201cdoji,\u201d \u201chammer\u201d and \u201cshooting star.\u201d<\/strong><\/em><\/p>\n

The doji is a prime example of what traders mean when they say a candlestick represents human emotion or market sentiment. When the asset price swings in both directions before closing near its opening price, it is clear the market is indecisive about the asset\u2019s true value.<\/p>\n

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The classic doji<\/strong>\u00a0candle representing an\u00a0indecisive market<\/em>\u00a0comprises equal-length wicks and a very thin, centrally located body. Further, there are several variations of doji, which signal trend exhaustion\/trend reversal.<\/p>\n

A hammer<\/strong>\u00a0is the precursor to a potential downtrend reversal and can be a big money maker for the bulls.<\/p>\n

Hammers are formed when price sinks below the open only to later return and then close above the open. Such price action signifies that at one point during the trading period sellers temporarily gained control but quickly gave it back and then some, for a bullish close to the candlestick.<\/p>\n

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The physical features of a hammer consist of only one wick roughly two times the length of the body which is located at the top of the candle.<\/p>\n

Last but not least,\u00a0the shooting star<\/strong>\u00a0is the exact opposite of the hammer.<\/p>\n

The shooting star occurs at the peak of an uptrend when the bulls rally to start the trading period, but eventually, lose control to the bears who drag prices to a close below the open.<\/p>\n

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It\u2019s important to keep in mind that the longer the duration of the candlestick, the more powerful its effect is on the overarching trend.<\/p>\n

For instance, a hammer spotted in a one-hour candlestick will have almost no impact on a 6-month long downtrend, whereas if the hammer formed on a 1-week long candlestick, its reversal impact would be much more significant.<\/p>\n

There are various ways to use and read a candlestick chart. Candlestick chart analysis depends on your preferred trading strategy and time-frame. Some strategies attempt to take advantage of candle formations while others attempt to recognize price patterns. So do your research and make the best use of it to become a successful trader.<\/p>\n