Candlestick charts are a technical analysis tool that packs data for multiple time frames into individual price bars. There are many significant benefits of candlesticks. While a line chart gives you only one data point for a stock at any point in time, candlesticks actually give you five: open, close, low, high and direction of movement. This is a major advantage when your trading decisions are based entirely on price action.
Completed candlestick charts are used in stocks, equity, foreign exchange and commodities trading to predict price direction. Proper color coding adds depth to candlesticks.
Today, candlestick charts are used internationally by day traders, swing traders, investors, and premier financial institutions. Candlesticks can be used in all time frames, whether you are a long term investor or a day trader.
What are some of the benefits of candlestick charts?
Easy to understand
Whether you are an amateur with regard to technical analysis or professional stock exchange trader, you can easily understand candlestick charts.
Give unique and more detailed market insights
Unlike bar charts which show only the trend of the move, candlestick charts additionally show the force that has brought about the move.
Provide early indications of market turning points
Candlestick charts can send reversal signals in a few sessions , rather than the several weeks needed for a bar chart reversal signal. This helps a trader to enter and exit the market with better timing.
Ideal for all markets
Candlestick charts can be used in the stock market, forex market, commodity market and can be a powerful trading tool for option trading.
Different parts of a candlestick chart
A candlestick chart has various parts with each of them having a different meaning.
Upper shadow – This is the top of a candlestick chart and shows the highest price. The body – A candlestick chart can have a green or red body. A green body signifies a bullish trend while a red body signifies a bearish movement. The shape of a candlestick body can either be short or long. A green , long body suggests that buyers are the ones controlling the market and the price is increasing. On the other hand, a red, long body suggests that sellers are controlling the market and the price is decreasing.
If a candlestick has a short body, it means that the market is uncertain. The shorter the body, the harder it becomes to predict the direction of the market.
When a candlestick lacks a body, its termed as Doji, meaning the trend is neutral. Neither the buyers nor the sellers are in control.
Lower shadow – This is the bottom of a candlestick chart and it shows the lowest price.
Basic candlestick patterns
Long black candle
It represents a bearish period in the market. During a trading session, the price of the stock was high and low in a wide range and it opened near the high and closed near the low of the day.
Long black candle
It represents bullish period, meaning prices were all over the map during the day, but the stock opened near the low of the day and closed near the high.
These are small , black or white bodies. This pattern signifies a very tight trading range between the open and the close, and its considered somewhat neutral.
These ones show periods in which the opening and closing prices for the period are very close or exactly the same.
There you have it. These are the major things you need to know about candlestick charts. Overall, these charts help stock traders to predict emotions surrounding a stock hence helping them to make better predictions about where that stock might be headed.