Candlestick charting is one of the first technical analysis tools known to investors dating back to the early 1600’s. A Candlestick is composed of a body and wicks which are formed using the open, high, low and close of prices during a specific period. The body of the candlestick, which is the middle of the bar, is either hollow or filled. The thin lines above and below the middle of the bar are the wicks.
A candlestick reflects price action throughout the period and relays the path of price action. When a security closes higher than the opening price, the body of the candle is drawn as hollow. The top of the body is the closing price and the bottom of the body represents the opening price. When a security closes lower the body of the candle red. The top of the body is the opening price and the bottom of the candle is the closing price.
Candle sticks can be used to generate different patterns given the information they provide above and beyond a standard bar chart. Every candlestick shows the direction of price action throughout the trading session. The relationship between the opening price and the closing price gives a trader a feel for the momentum at the end of the day.
One of the most intuitive candle stick patterns that can assist in generating a signal is an engulfing pattern. The bullish engulfing pattern is one in which the prices for the current time period fully engulf the prior periods candlestick. Generally the wicks of the current period are both higher and lower than the prior period. A bullish engulfing pattern generally sees follow through and can be used as a trigger to purchase a security.