Candlestick chart is a very popular component of technical analysis, enabling traders to interpret price information from a few price bars.
This price chart shows high, low, open, close prices of a security for a specific period.
It is a chart that contains individual candles used by traders to understand price actions. Candlesticks can also form individual formation which could indicate buy or sale entries in the market. The period that each candle represents depends on the time frame chosen by the trader.
The relationship between the days open, high, low, and close determines the look of the daily candlestick.
Candlestick charts originated in the 17th century in Japan by a Japanese rice trader Munehisa Homma. He discovered that, while there was a link between price & supply & demand for rice, the market was strongly influenced by the emotions of traders.
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.
Elements in Candlestick:
- Open Price:
This is the first price traded during the formation of the new candle.
If the price starts to trend up, candles turn green or blue. If the price declines, candles turn red or black. (colour of candle depends on chart setting. )
● Close Price:
This is the last price traded during the formation of the new candle.
If the close price is below the open price the candle will turn red by default in most charting packages.
If the price is above the open price candle will turn green/ blue. (The colour of the candle depends on chart setting.)
A hollow or filled portion of a candle is known as the body which represents open-to-close range. Also known as ‘Real body’. When the real body is filled in or black, means the close price was lower than the open price. If the real body is empty, means the close price was higher than the open price.
Real bodies can be long or short and black or white.
Just above & below the real body is the shadow or ‘Wicks’ or ‘Tails’. The shadows show the high and low prices of that day’s trading.
They show extremes in prices for a specific charting period.
We can identify them quickly as they are visually thinner than the body of a candlestick.
It is very helpful for traders to keep eye on market momentum & away from static price extremes.
If the upper shadow on a down candle is short, it indicates that the open that day was near the high of the day. A short upper shadow on an up day dictates that the close was near the high. Shadows can be long or short.
● High Price:
The top of the upper shadow indicates the highest price traded during the period. If there is no upper shadow means the open price or close price was the highest price traded.
● Low Price:
The lower price traded is either the price at the bottom of lower shadow & if there is no lower price then the lowest price traded is the same as close price or open price in the bullish candle.
Over time, Individual candlesticks form patterns that traders can use to recognize major support. There are many candlestick patterns that tell us about opportunities within the market. Some give us insights into the balance between buying & selling pressure, while others identify market indecision. Before anyone starts trading, it is important to get familiar with the basics of candlestick patterns.
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