Foundations: The Story Behind a Candlestick

We introduced you to the topic of candlesticks in a previous Stock Market Made Simple blog called Anatomy of a Candle, which you can review here if you wish. The SMMS ​blog presented the various parts of a candlestick and what they represent. In today’s blog, we are going to look a little deeper at candlesticks as they are taught in Foundations of Stocks and Options Level 2 Class 5 and discuss the story behind a candle’s shape and color.

A candlestick graphically shows ​what the marketplace is thinking without us going out and talking to hundreds or thousands of traders and investors. Therefore, it would behoove ​all of us to know what everyone is saying with their money when it comes to a particular company. So let’s dive into the narrative that a candlestick tells a story, and to give this viewpoint some context, let’s breakdown the doji candlestick.

​The Doji Candle

The doji candle is a specific type of spinning top candle which is missing the body part of a candlestick. Since the opening price of the candle and the closing price of the candle are the same, it makes a line shape across the candle in place of a candlestick body. A doji candle is a complete balance of the bulls and the bears at the closing of the time period the candle represents. Usually, when a doji candle is found at a pivot point, it is a reasonably strong reversal sign.

The doji comes in a variety of sizes, which have a few different meanings: the normal doji, the long-legged doji, the dragonfly doji, the tombstone doji, and the sometimes ‘mostly’ doji. As we listed in the previous paragraph, a doji candle is where the candlestick has the same opening price and closing price for the time period of the candle. Usually, the candle’s upper and lower wicks are similar as well.

The Long-Legged Doji​

The long-legged doji is very similar to the normal doji; however, the upper and lower wicks are much longer than the normal doji. This shows there was more buying and selling pressure throughout the period, but ultimately the closing price ended up where it started. Same results, but there was more activity driving the price higher and lower.

The Dragonfly Doj​i

The dragonfly doji is the same as all dojis, where the opening and closing price for the time period ends up being the same. However, the dragonfly doji has a large lower wick, which represents a strong sell-off push, but not strong enough to cause any price lost as with all dojis, the period closes the same, and the price pushed back up where it started.

The Tombstone Doji​

The tombstone doji is the reverse of the dragonfly doji. As the dragonfly doji has a large lower wick, which represents a strong sell-off push, the tombstone doji has a large upper wick, which represents a strong bullish push. As with the dragonfly doji, the push in price was not strong enough to be sustained, and the price dropped back where it started but it is indicative of buying pressure attempting to push the price higher.

The ‘Mostly’ Doji

Finally, the ‘mostly’ doji, is in shape and form similar to the doji, it just missed being a doji due to the starting and ending price point being slightly different.

The interesting thing about all of the dojis is the nuances of the wicks as some show buying pressure, some show selling pressure, and some show equal buying and selling pressure; but all of them reveal the ebb and flow of the marketplace. When you understand the tides of sentiment, you can then capitalize on them to make better and more informed trading decisions.

In closing, there are a plethora of candlesticks which can be found in the charting wilds, and we have started a monthly look at the more common or popular ones under the banner of our: Mastering Candlesticks blogs. These candlestick focused blogs drop on the third Thursday of every month, and you can quickly find all of them by clicking on the blog category Mastering Candlesticks to the right of this page. Also, we have created a quick flashcard guide to the top candlesticks which you can download here.

​Thank you for reading, and we hope to see you next week as we dive into the Foundations of Stocks and Options Level 2 Class 6!