The candlestick chart is
one of the most used charts in trading nowadays. It is thought to have been
developed in the 18th century by a Japanese rice trader Munhisa Homma. He
discovered that by drawing the price movements as a “candlestick” he will have
more information that can be used in trading. In time analysts and
statisticians have discovered patterns which indicates with a certain
probability a continuation or a reversal in the price action of a certain
instrument.
Let us see how a candle is
formed and what its characteristics are:
A bar shows the open price,
for a specific time frame, the high and the low of the session and the closing
price of that time interval. In the image you can see that the open price is on
the left and close price on the right. Because the close price is higher than
the open price we consider it to be an ascending candle.
If we are to draw a right
horizontal line at the open price and a left horizontal line at the close
price, like in the example above, afterwards fill the section with green we
will have an ascending candlestick. This type of representation it is
considered to offer more information about what happened in the trading
session. A candlestick is formed of a body and upper/lower wick or shadow. The
body is a specific element very important for traders.
In the current examples I
have used the custom colors for showing ascending and descending colors. Green
usually represents a rise in the price, while red represents a fall and
characterizes the bears. Don’t be limited to these colors. You will find that
white (rise) and black (fall) are also used, or you can even customize them to
fit your character and needs.
If the candle’s body has a
specific shape it could tell the trader how powerful bulls or bears are. I will
bring up several types of candles that usually show the market direction and
determination.
Marubozu – It is showing
the direction of the market and which traders, bulls or bears are in control.
It is formed only by a body with no shadow. It show that the market has
strength in one of the directions. This interpretation can be applied also at
candles with long bodies and very short wicks.
Spinning Tops – They show a
balance between buyers and sellers and it is interpreted as indecision, a
market pause. This candle is characterized by a small body and the upper and
lower shadow almost equal. Indifferent the color they have it means the same
thing.
Doji – It shows indecision
and balance and it has the same interpretation as the Spinning Top but this one
is characterized by the fact the opening price is as same as the closing price
and the wicks are almost equal.
It is important to
understand these basic elements about the candlesticks to be able to use them
at their full potential. It is not enough to just take them as they are and
hope for the best. In time strategies and patterns have emerged which rises the
probability for a winning trade based on this type of chart. In our next
article about candlestick we will talk about these patterns and discuss
strategies that can be used in day to day trading on the Forex market or any
other financial instrument.
By RAZVAN MIHAI at http://investazor.com
