A Basic Introduction To Candlesticks:
Long before the trading of Stocks and Commodities, the Japanese were using technical analysis to trade rice in the 17th century. Their version was naturally very different from modern TA, yet several of the principles are the same.
- The “what” (price action) is more important than the “why” (news, earnings, and so on).
- All known information is reflected in the price.
- Buyers and sellers move markets based on expectations and emotions (fear and greed).
- Markets fluctuate.
- The actual price may not reflect the underlying value.
Candlestick patterns are an instrumental component of technical analysis. They are used to accurately and honestly analyze data within any given period of time or number of trades (or ticks). Letting the computer extrapolate the data and create it in chart form can teach a trader to identify certain supports and resistance points in any given chart. Using this information, a keen and trained eye can quickly ascertain the potential direction and gives the trader the best chance of a profitable trade.
As you can see below, there are two basic parts in the candlestick: The body and the shadows. The body demonstrates the range between the open and closing prices. The shadows provide confirmation of the high and low trades of the day. Most candlestick charts add contrasting colors, such as green/red or black/white, to better distinguish these trends. A red candlestick signals that the closing price is lower than at the beginning of the time period represented, while a green candlestick indicates a higher closing price.
The benefit of candlestick charts lies in their ability to display meaningful information concisely. The recognition of the pattern is subjective and programs that are used for charting have to rely on predefined rules to match the pattern. There are 42 recognized patterns that can be split into simple and complex patterns.
Let’s take a look at some simple candlestick formations:
The ability to identify specific chart patterns fluctuates from trader to trader, but the basic information shown above is generally regarded as extremely useful. The potential for a profitable trade is greatly enhanced if the trader can quickly ascertain a proper setup, and implement action based on their trading plan.
With study and practical application, any trader using candlestick charts can trade with a degree of confidence. The key to progress is daily education and an open mind to let the price action dictate the trade.