Candlestick Charts to Shed Light for Trading Decisions
Candlestick charts are like bar charts, but the thickness of the bars and the color codes help them depict positions better. TradeZero Ocean Place Cable Beach, Unit #1 Nassau, Bahamas
As part of trading education for successful online stock trading, charts are important analysis tools. They present objective data in a manner that can help in understanding the present state of the market and the path it could potentially follow. You may have heard of the strangely named candlestick charts. These charts can be very useful in helping you make the right trading decisions. Candlestick charts pre-date even the point-and-figure and bar charts, with their origin being Japan, back in the 1700s. The Principle behind Candlestick Charts The basic principle behind the discovery of candlestick charts is that, while a link exists between supply and demand and price, traders’ emotions play a major role in the markets. While emotions cannot be usually described analytically, candlesticks can reveal those emotions through visual representation of price moves in various colors. Traders can use these candlesticks for making trading decisions on the basis of patterns occurring regularly. These help in forecasting the price’s short-term direction. How the Candlestick Chart Works Here’s an example of a candlestick chart provided by Cory Mitchell in this Investopedia article:
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As you can see, a daily candlestick reveals the day’s high, low, open and close price. The wider part of the candlestick is the “real body”, which clearly represents the open and close price range of the day’s trading. When, as in the left candlestick in the above chart, the real body is in black, the open is higher than the close. An empty real body, as in the right of the picture, shows that the close is higher than the open. These colors can be altered by traders in their respective trading platform. Down candles are usually given a red shade rather than black. Up candles usually get shaded green rather than white. Candlestick Patterns Mitchell reminds that candlesticks are usually created by fluctuating price movements. While these price movements could sometimes be random, they also form patterns that can be used for trading or analysis. Patterns can be bullish or bearish. Bullish patterns are an indication of the possibility that the price could rise. Bearish patterns indicate the potential for the price to fall. But it’s important to remember that there isn’t a pattern that works always. Candlestick patterns are usually representations of price movement tendencies. They aren’t guarantees. Candlestick Charts and Bar Charts Candlestick charts depict just about the same information as bar charts. The only difference is that candlestick charts are more visual in their description since the price bars are color coded with thicker real bodies that are better at conveying the gap between the open and the close. The comparison below, from Investopedia, illustrates the difference:
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Traders usually like the graphs to present as much practical detail as possible, to help them plot their next move. In that sense, candlestick charts are effective and manage to convey the market situation with a bit more clarity.
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