Understanding Candlesticks

Welcome to Technical Friday with Cryptolu where every thing technical analysis is made simple. It's an interactive class so do well to share your thoughts whenever it's needed. Let's get started.

(Cryptolu's private teacher enters the class and starts writing on the board)

Cryptolu : Good morning ma

Teacher : Morning Cryptolu, In Today's class we'll be going deeper into what Candlesticks mean and how they can be used in the markets. I hope you went through the first class lesson. If you did good for you and if you didn't you are on your own.

(Brings out a picture of a well drawn human being)

Teacher : What is this?

Cryptolu : A picture of a Human Being.

Teacher : Good. This picture can also be used to define Candlesticks. The human body has the head, the body and the legs. That's the same way we have the high, body and low for candlesticks.

(Brings out a picture of a Candlestick)

Don't confuse yourself by staring too much at that picture if you don't understand what's there. The high and low as you can see in that picture are called Wicks. The body can be divided into two : 1) Open and 2) Close. Let's me explain better now.

(Brings out a picture of Point A to B)

Remember in our first class when I said if a Candlestick is going up it is called a BULLISH candle and if a Candlestick is going down it will be called a BEARISH Candle. I'm reminding you so when I start mentioning the word Bullish and bearish it won't sound strange to you.

Now when a Candlestick moves upward from point A to B what will it be called? It will be called a Bullish Candlestick and also if it moves backward from point B to A it will be called a Bearish Candlestick. Did you understand what I said?

Cryptolu : Yes ma. But I'm still confused on what the open and close in that picture means.

Teacher : The OPEN is the point A where the Candlestick starts moving from and the CLOSE is the point B where the candle stops. Are you clear? If you are explain what I just said.

Cryptolu : I understand ma. You just said that when a Candlestick moves from a lower point to upper point then it's called a BULLISH candle and of the Candlestick moves from a upper point to a lower point then it will be called a BEARISH candle.

For the Bullish candle the lower point at which it starts moving from is called the OPEN while the lower point it stops is called the CLOSE and vice versa for the BEARISH candle.

Teacher : (Smiles broadly) Oinnn, Cryptolu you're doing well. Now let me explain what the high and low means.

A young graduate was told to drive from point A to point B to win a brand new Lamborghini, he happily said Yes and started driving when he got to point B he decided to overdo and drive past B maybe he might be given a house with the car he was promised. At the end of the race he was only given a Lamborghini and he wasn't commended for his overdo.

Cryptolu : (Looking confused) Why ma? His tracks were there, why didn't they commend him?

Teacher : It was not part of the instructions he was given. The point he went to after passing B is referred to as high while any reverse he made back below A is the low. So if a candle moves from point A to B and trespass beyond B, the point it trespassed to will be shown as the high but it won't be part of the open and close while if it went below A that will be shown as the low. I hope I'm clear now?

Cryptolu : Yes you are ma. Very!

Teacher : Good. Now we'll be moving to types of Candlesticks. Note, you don't need to cram these Candlesticks and their names as it's not necessary to. I will only be showing you 4 different types just for you to know what they look like. They are the hammer, hanging man, bullish engulfing and bearish engulfing.

( Brings out a picture of a hanged man and a hammer)

This types of Candlestick is called has two different names ( The Hammer and Hanging Man) depending on where it occurs. If it appears after a uptrend then it will be called a hanging man and if it occurs at the end of a downtrend it will be called a Hammer.

(Brings out a picture of a Hammer Candlestick and Hanging Man)

The Hammer is the stubborn Candlestick that was told to move between a small point A to B but decided to go down below A first before coming back up to B but decided to do small overdo past B or didn't do at all. So most of the time it is a Bullish pattern i.e when it shows on a chart at the end of a downtrend then the market should go up after that.

The Hanging Man is the second stubborn Candlestick that was also told to move from B to A but decided to go above B first before coming down to point A and decided to do small overdo or didn't do overdo at all. So most of the time when you see it at the top of a uptrend then the market might likely go down from there. I hope I'm clear?

Cryptolu : Yes ma. I understand clearly.

Teacher : Now to the last two I'll be talking about today. The Bullish Engulfing and the Bearish Engulfing.

(Brings out a picture of a man and his son)

Now a engulfing means when something overshadows the other i.e the man engulfed his son with his height.

(Brings out a picture of a Bullish Engulfing and Bearish Engulfing)

The Bullish Engulfing means a Bullish candle ( a candle going up) totally covers a bearish candle ( a candle going down) with it's body while the bearish engulfing means a bearish candle ( a candle going down) totally covers a Bullish candle( a candle going up) with it's body.

In the case of the Bullish Engulfing if it occurs after a downtrend it shows that the buyers are stronger than the sellers and might be ready to move price up while for the bearish engulfing if it occurs after a uptrend it means the sellers have overcome the buyers and might be ready to move price down.

That's all for today's class I hope I was able to convince and not confuse you.

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