The Japanese were the first to develop candlestick charts. As they were traditionally involved in rice trading they needed a method to better analyse the rice markets and so they came up with an elementary version. Subsequently, candlestick charts were refined and evolved over time by technical analysts worldwide and are now used by the majority of modern traders. They provide more information than line charts and they are also more attractive to the eye.
Whereas a line chart will only give one price for one time point, a candlestick provides price details over a set period of time. This period can be a week, a day, or an hour. Which time period to choose depends on the trader’s strategy and which market they are trading.
a close look at candlesticks
A candlestick’s primary part is the body, which is the rectangular shape formed by the open and close price levels. Just like old televisions, in the past Japanese used black and white bodies for price charting but a large number of traders currently use green and red colours to distinguish between increase and decrease of prices. However, most trading platforms now offer the ability to choose any colour pairs you like. A green coloured candlestick means that the price increased over a set period of time, and a red coloured candlestick implies that the price decreased over a set period of time. Hence, a green candlestick will have the closing price level on top of the opening price and a red one would have the closing price below the opening price.
You will notice that candlesticks usually have pairs of vertical lines drawn as extensions from the upper and lower part of the body. These are called the shadows, or wicks, and are there to give information about the highest and lowest price over a set period. The top point of the upper shadow is the highest price within the period and the bottom point of the lower shadow represents the lowest price within the period. In case there is no upper shadow, it means that the upper part of the body also represents the highest price within the set time period and if there is no lower shadow, it means that the lower part of the body is also the lowest price.
There are many patterns formed by candlesticks that provide hints on when to enter a position, but their ability to forecast would be surely enhanced if used in combination with other technical indicators such as Moving Averages, Bollinger Bands, or RSI. Similarly, candlestick patterns should be consulted in parallel to fundamental analysis as economic data and news are often able to move the markets instantly and with force. In other words, they are not the only forecasting tool to be consulted on their own, but they provide instant visual information about a market’s state and greatly assist in making more informed decisions.
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