Understanding Candlestick Charts

Candlesticks show that emotion by visually representing the size of price moves with different
colors. Traders use the candlesticks to make trading decisions based on regularly occurring
patterns that help forecast the short-term direction of the price.

A candlestick chart is a style of financial chart used to describe price movements of a security,
derivative, or currency. Each "candlestick" typically shows one day, thus a one-month chart may
show the 20 trading days as 20 candlesticks. Candlestick charts can also be built using intervals
shorter or longer than one day. It is similar to a bar chart in that each candlestick represents all
four important pieces of information for that day: open and close in the thick body; high and low
in the “candle wick”. Being densely packed with information, it tends to represent trading
patterns over short periods of time, often a few days or a few trading sessions.

FIGURE: 01

Candlestick chart of EUR/USD currency pair on daily timeframe in Meta-Trader 5 trading platform.

Candlestick charts are most often used in technical analysis of equity and currency price patterns.
They are visually similar to box plots, though box plots show different information.

Candlestick Components

Just like a bar chart, a daily candlestick shows the market's open, high, low, and close price for
the day. The candlestick has a wide part, which is called the "real body." This real body
represents the price range between the open and close of that day's trading. When the real body is
filled in or black, it means the close was lower than the open. If the real body is empty, it
means the close was higher than the open.

FIGURE: 02

Traders can alter these colors in their trading platform. For example, a down candle is often
shaded red instead of black, and up candles are often shaded green instead of white.

Description

The area between the open and the close is called the real body, price excursions above and
below the real body are shadows (also called wicks). Wicks illustrate the highest and lowest
traded prices of an asset during the time interval represented. The body illustrates the opening
and closing trades. The price range is the distance between the top of the upper shadow and the
bottom of the lower shadow moved through during the time frame of the candlestick. The range
is calculated by subtracting the low price from the high price.

If the asset closed higher than it opened, the body is hollow or unfilled, with the opening price at
the bottom of the body and the closing price at the top. If the asset closed lower than it opened,
the body is solid or filled, with the opening price at the top and the closing price at the bottom.
Thus, the color of the candle represents the price movement relative to the prior period's close
and the "fill" (solid or hollow) of the candle represents the price direction of the period in
isolation (solid for a higher open and lower close; hollow for a lower open and a higher close). A
black (or red) candle represents a price action with a lower closing price than the prior candle's
close. A white (or green) candle represents a higher closing price than the prior candle's close. In
practice, any color can be assigned to rising or falling price candles. A candlestick need not have
either a body or a wick. Generally, the longer the body of the candle, the more intense the
trading.

Candlesticks can also show the current price as they're forming, whether the price moved up or
down over the time phrase and the price range of the asset covered in that time. Rather than
using the open, high, low, and close values for a given time interval, candlesticks can also be
constructed using the open, high, low, and close of a specified volume. In modern charting
software, volume can be incorporated into candlestick charts by increasing or decreasing
candlesticks width according to the relative volume for a given time period.

Usage

Candlestick charts are a visual aid for decision making in stock, foreign exchange, commodity,
and option trading. Looking at a candlestick, one can identify an asset’s opening and closing
prices, highs and lows, and overall range for a specific time frame. Candlestick charts serve as a
cornerstone of technical analysis. For example, when the bar is white and high relative to other
time periods, it means buyers are very bullish. The opposite is true for a black bar. A candlestick
pattern is a particular sequence of candlesticks on a candlestick chart, which is mainly used to
identify trends.
 CHAPTER 2
LITERATURE SURVEY
I. Predicting Stock Price Trend Using Candlestick Chart Blending
Technique
The author “Yoshihisa Udagawa” deals with a technical analysis for stock price
predictions using candlestick charts. The stock prices are apt to show no directional
movements when there is no significant news, resulting in generating a series of noisy
candlesticks. We propose a blending algorithm that combines candlesticks sharing
certain price ranges into one candlestick to eliminate the noisy candlesticks. The
paper discusses statistical measures on candlesticks to produce appropriate blended
candlestick charts for the prediction. The experimental results on the Nikkei-225
stock average show that the blended candlesticks are successful in offering
information for short-term stock price predictions. The performance of the proposed
algorithm is measured showing that it can blend daily candlesticks of 25 years within
two seconds.

II. Stock Prediction by Searching for Similarities in Candlestick Charts

The aim of stock prediction is to effectively predict future stock market trends (or
stock prices), which can lead to increased profit. One major stock analysis method is
the use of candlestick charts. However, candlestick chart analysis has usually been
based on the utilization of numerical formulas. There has been no work taking
advantage of an image processing technique to directly analyze the visual content of
the candlestick charts for stock prediction. Therefore, in this study we apply the
concept of image retrieval to extract seven different wavelet-based texture features
from candlestick charts. Then, similar historical candlestick charts are retrieved based
on different texture features related to the query chart, and the “future” stock
movements of the retrieved charts are used for stock prediction. To assess the
applicability of this approach to stock prediction, two datasets are used, containing 5-
year and 10-year training and testing sets, collected from the Dow Jones Industrial
Average Index (INDU) for the period between 1990 and 2009. Moreover, two
datasets (2010 and 2011) are used to further validate the proposed approach. The
experimental results show that visual content extraction and similarity matching of
candlestick charts is a new and useful analytical method for stock prediction. More
specifically, we found that the extracted feature vectors of 30, 90, and 120, the
 number of textual features extracted from the candlestick charts in the BMP format,
are more suitable for predicting stock movements, while the 90 feature vector offers
the best performance for predicting short- and medium-term stock movements. That
is, using the 90 feature vector provides the lowest MAPE (3.031%) and Theil’s U
(1.988%) rates in the twenty-year dataset, and the best MAPE (2.625%, 2.945%) and
Theil’s U (1.622%, 1.972%) rates in the two validation datasets (2010 and 2011).

III. Short-Term Stock Market Prediction Based on Candlestick Pattern

Analysis
 CHAPTER5
CONCLUSION AND FUTURE WORK

REFERENCES
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