Candlestick chart- What is it, Definition, Meaning, How does that work?
What Is a Candlestick Chart?
Candlestick shapes are used to graph the price movements on a candlestick chart. Each shape displays the amount of open, closed, high, and low for the selected period. The body is the open and close price; if it is filled, it indicates the price falls; if it is hollow, it suggests the price rises. The wick, which represents the high and low price, is extended from the body.
The Anatomy of a Candlestick
The anatomy of a candlestick is as follows:
- Open: a horizontal bar on the body's left showing an asset's opening prices.
- Close: a horizontal bar right of the body, which represents the final price of the asset at that time.
- The body: The thick part of the candlestick between the open and closed rate. A green or white body indicates the closing rate was above the opening or was a buyer and bullish. A red or black body indicates the closing rate was lower than the opening rate or was a seller and bearish.
- Wicks or shadows: Thin lines above and below the body represent that period's highs and lows.
Benefits of Using Candlestick Chart
Candlestick charts have several advantages, making them a necessary tool for traders and market analysts. The features of candlestick charts can explain their effectiveness and popularity in the interpretation of price changes:
- Candlestick charts provide value by offering a psychological picture of the market. The colour-coded form of the candlestick chart helps traders understand the market sentiment – issues of optimism or pessimism within market players.
- Candlestick charts are highly informational. Unlike line charts or bar charts, a single candlestick contains essential price movement information at a glance within a trading period – open, close, high, and low prices presented within each candlestick.
- The visual nature of candlestick charts simplifies interpretation. Candlestick charting is easy to interpret as a single look can quickly make one understand the price changes or patterns, making it easy to identify trends, reversals, and critical price levels imperative for making an informed trading decision.
How Does a Candlestick Chart Work?
Candlestick charts are helpful for quickly spotting price patterns and trends, which is essential for technical analysis. The colours, shapes, and designs of candlesticks let you interpret market sentiment and make good trading decisions. For example, a long green candlestick with a tiny or no upper wick implies a severe buying force since the asset started low and closed near high. In contrast, a long red candlestick with a small or no lower wick indicates tremendous selling pressure; here, an asset opened high and closed near the low. Furthermore, particular candlestick configurations, such as a hammer or a shooting star, give prospects for price volatility continuation or reversal.
Common Candlestick Patterns
Candlestick patterns are created by one or more candlesticks united by their shapes, colours, and positions about each other. Below are examples of a few common patterns:
- Hammer: A small body with a long lower wick created after a downtrend; this pattern may hint at a potential price change to an uptrend.
- Shooting Star: A small body with a long upper wick created after an uptrend; this pattern may forecast a potential price change to a downtrend.
- Doji: A candlestick with equal or almost equal open and close prices and a long tail indicates the market’s indecision and an opportunity for a possible trend reversal.
- Engulfing: This is a candlestick much greater than the body of the previous one; its formation implies that the current trend might continue or reverse.
- Morning Star: A bullish reversal pattern consisting of three candlesticks. The first is a long red candle with a short candlestick on the second, and the third is a long green bar.
- Evening Star: Bearish reversal pattern comprising three candlesticks opposite the Morning Star.
Conclusion
The anatomical structure of candlestick charts and the ability to identify specific patterns create a comprehensive tool to evaluate market sentiment. Technical analysis must always be integrated with fundamental analysis and effective risk management. If you want to put your newly acquired knowledge of candlestick charts into action and start investing in stocks and mutual funds, INDmoney offers a platform that makes it even easier.
What colours are used in candlestick charts?
Green or white means the finishing price of the asset is higher than the opening one, red or black – and vice versa.
Can candlestick charts be referred to as your class of asset?
Candlestick charts track price changes in any asset class, whether stocks, currencies, commodities, or cryptocurrencies.
Can I comprehend candlestick charts on short-term and long-term trading?
Yes, you can use them in short-term and long-term trading strategies at any given time frame, from minutes to years. If you want some other best long-term stocks, check out this guide.
Do candlestick charts predict price advances that will occur at a later date?
While candlestick charts provide market sentiment and potential price movement, they cannot predict future price changes. Thus, technical analysis supports fundamental research and proper money management.
Are candlestick charts suitable for unfamiliar beginners?
This is correct. Candlestick charts are straightforward, so they should be one of the first data you study. Hence, new traders to stock market concepts should stay here.
Can candlestick charts be combined with other technical indicators?
Yes. There are several technical indicators used to combine candlestick charts. As mentioned earlier, one can incorporate those candlestick charts with other indicators to form accurate predictions of stock prices.
What are the limitations of candlestick charts?
Even though they are instrumental, such candlestick charts are made using historical price data. Not all predictions may be realised when the price action begins to develop. It can also be confusing because each trader may prefer what to view in the market.
What are Two-Day Candlestick Trading Patterns?
Two-day candlestick trading patterns are technical analysis tools, and these patterns are formed by an asset's open, high, low, and close prices during two consecutive days. Such common patterns as engulfing, harami, piercing, and dark cloud cover are employed to identify potential price reversals or indicator shifts. Additionally, these patterns generate entry/exit signals when paired with other indicators.
How can I practice candlestick charts?
You can practice candlestick charts by looking up the historical prices of other assets and the different timeframes. Most trading platforms have the feature of a candlestick chart, while others provide a link which can help you.