An Introduction to Candlesticks

An Introduction to Candlesticks

An Introduction to Candlesticks
By Diana O.

Candlesticks is a method of charting used to analyze supply and demand, similar to the bar chart used to view price activities. The Candlestick chart also shows the same data as the bar chart except that it focuses on the connection between opening prices and closing prices. The Candlestick method is important for helping investors see prices from a different perspective and many investors even find that they are easier to read.

Why is it called Candlesticks?

The Candlestick Chart is actually the oldest chart type that was used to predict prices. It was first used in the 1700s when the Japanese utilized it to analyze and predict the prices of rice. The chart is composed of white and black candles, usually with 'wicks' found at both ends. How the candlestick looks and what color it contains can indicate several things.

For example, a black body indicates a close that is lower compared to the open within a specific time period. This points to a bearish market. A body that is white or open indicates a close that is higher compared to the open, which points to a bullish market. A vertical line found above or below the candlestick body is referred to as the upper or lower shadow, representing the high and low price extremes for that period.

If you know what you see when you look at charts, you'll find that the Candlestick chart is much more 3-dimensional compared to regular bar charts. To the trained eye of an investor, a Candlestick chart offers more in terms of appeal compared to the standard bar chart. There are four factors that make up a Candlestick chart. These are the open, closing, high and low pricing within a particular time period. For Japanese analysts, open and closing prices are considered the most critical in a given day.

The Japanese have given names to each Candlestick formation. There are many of them and it would be wise to learn and understand them all. Here are some:

White candlestick: occurs when closing prices are higher compared to the open.

Black candlestick: occurs when the opening prices are higher compared to the closing

Shaven Head: a candlestick that does not have an upper shadow

Shaven Bottom: a candlestick that does not have a lower shadow

Doji line: this does not have a candlestick body. You see a horizontal line instead, indicating that the open and closing are close or almost the same.

Spinning tops: appears as small candlesticks and indicates a balance between the bears and the bulls. Spinning tops can appear as black or white.

Shadow and Tail: the shadow refers to the part of trading range found outside the body. A long tail indicates support while a tall shadow shows resistance.

Hammer: this appears as a candlestick (may be black or white) has a small body and lower shadow that is two times the length of the body, with very little or no upper shadow. This candlestick should appear in a downtrend to be called a hammer.

The Morning Star: similar to the island pattern that appears on a bar chart and is considered as a reversal pattern indicating a bullish bottom. This appears as 3 candlesticks with the first one having a black body, the second with a small body with gaps or opens and the third as a white candlestick that moves into the black body during the first period.

The Evening Star: is considered as a reversal pattern indicating a bearish top, also appears as 3 candlesticks. The first candlestick is white and long and the third has a black body that moves into the white candlestick. The one in the middle is the one that forms the star.

Hanging man: has small bodies and long wicks or lower shadows. Considered bearish if they appear after an up trend.

Dark cloud cover: a white candle and a black candle that is considered bearish if it appears during an upward trend.

How can a Candlestick chart help me?

The major advantage of Candlesticks is that it provides investors with an easy-to-read system with which to view any changes that might occur in supply and demand. Simply by using the Candlesticks to perform critical day analysis, investors can find evidence of any trend reversals in time. This serves as an advance warning to investors about how the market will move. Used in combination with other methods and with market indicators, Candlesticks can provide investors with a lot of potential in trading.

Why do I need a Candlestick chart to read prices?

Prices are a product of supply and demand and they are subject to many things aside from prevailing economic conditions. Prices are also affected by many human emotions such as greed, panic, fear, even hysteria. These emotions often cause dramatic change on prices. Besides, many of the movements that occur in the market are not always based on fact but on expectations.

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