Candlestick pattern is the most popular tool used by the trader for technical analysis than other such as lines or bar graphs. The major reason for its growing popularity is that these provide a ton of information to the trader in just a glance. Candlesticks are easy to interpret and read thus making them a perfect tool for technical analysis. The candlestick charts consist of a body that is rectangular in shape and shadows that represent lines above or below the rectangular body. Besides this, every candlestick chart includes open, close, high, and low prices. The time frame of the candlestick chart depends upon the trading horizon of the trader. All the benefits of candlestick charts are very vital, but these benefits can only be enjoyed when one knows how to interpret the charts properly. To do so one must know all the terms and what they represent in the candlestick chart properly. These are mentioned below:
- Open: The open represents the first price that is being traded. This is represented on the body of the candlestick chart either on the top or bottom.
- Close: The close represents the last price that is being traded. It can also be either on the top or bottom of the candlestick chart.
- High: The high represents the highest price being trading in a given time frame. It is indicated by the upper shadow that occurs above the body. High price could be anything i.e., open, close, or within the time frame. In case the open price is the highest price there will be no room for the upper shadow.
- Low: The low represents the lowest price being traded in the given time frame. It takes place below the body of the candlestick chart known as the lower shadow. If the open is the lowest price, then there will be no lower shadow.
- Range: Range is nothing but the price difference between the upper and lower shadow. The range is calculated by subtracting the low and the high. It represents the volatility thereby higher the range higher will be volatile.
Candlesticks are known for their ability to create patterns that can be used by traders to interpret the trend. It can also be used to identify short-term trading opportunities. Different traders use candlestick charts in different ways. You should use candlestick patterns in conjunction with the current trend.
Candlestick is also a leading indicator that gives traders an advantage when entering or exiting trades. Candlestick also provides an early indicator of a trend change in comparison to other technical indicators. It is therefore widely used in short-term trading and volatile markets.
Candlestick complements many of the technical analysis indicators and is well-suited for use with western technical tools. Candlestick patters can also be used as support or resistance levels, and signify the beginning of a pullback.
Interpreting candlesticks charts is one of the very first steps in learning how to trade. Once a trader has gained knowledge to interpret a chart he can then move on to the other aspects of technical analysis and develop trading strategies as per his needs.
Candlestick patterns are usually formed over a period between 1-3 days. This makes them short-term patterns which can be used for up to 10-15 trading sessions. Hanging man and hammers, for example, only require one day. Two days are required for engulfing patterns and bullish belt holds. The pattern will take three days to complete, with the exception of the evening stars and three white soldiers.
The significance of candlestick patterns is determined by their position within the trend. A reversal candlestick design has validity only when it forms at the end the current trend. There should be a previous trend to reverse. A prior downtrend is required for bullish reversals, while a prior uptrend is necessary for a bearish reverse. Trend lines, moving averages and peak/trough analysis can help determine the direction of the trend.
The colour of the candlestick chart depends upon whether the closing price is below or above the opening price. If it is higher than the opening price candlestick chart will be of green colour whereas it will be of red colour in case it is lower than the opening price. Except for the opening price every other parameter fluctuates. When the time frame of the candlestick chart gets completed, the last price is the close price and thus formation of candlestick charts comes to an end. The length of the candlestick represents the majority of trading. The long body represents the trading is mainly in one direction whereas a shorter body represents lighter trading. This is then used by the trader to understand the price movement.
Candlestick charts are the steppingstone for any trader in the world of trading and thus one must gain as much knowledge and understanding of it through the right source such as 5paisa. With their right guidance, one can devise the right strategies based on his needs and requirements.