One of the most popular charts used in technical analysis is the Candlestick Charts. Originally created by the Japanese, these charts capture the buying and selling pressure in a period. It gives a quick idea about the market trend as well as changes in buying and selling pressures due to its visual quality.
PARTS OF A SINGLE CANDLESTICK
Please refer to the attached image. There are three parts of a Candlestick – Upper Shadow, Lower Shadow and the Real Body. The Upper Shadow shows the highest prices during the period, the Lower Shadow the lowest prices and the real body the movement between the period open and period close prices.
BEARISH AND BULLISH CANDLESTICKS
You can notice in the attached image that there are two distinct kinds of charts – filled charts (in red) and hollow charts (in green).
The filled charts are the Bearish Charts and the hollow charts are the Bullish Charts. In the Bearish Charts the open price is higher than the closing price as shown in the attached image. For the Bullish Charts the opposite is true.
READING A CANDLESTICK
We already learned that we can understand whether there is a bullish (buying) or a bearish (selling) pressure during a period by just the type of the candlestick. The upper and lower shadows show the highest and the lowest prices during a period.
The length of the candlestick signifies the range of the price movement in that period. A longer candlestick means a higher intra-period volatility in price.
A long real body means that the open and close prices for a period and significantly different, a shorter real body (or non-existent real body) means they are closer to each other or the same.
No upper shadow means the market opened at a period high for a bearish candlestick and closed at a period high for a bullish candlestick.
No lower shadow means the market closed at a period low for a bearish candlestick and opened at a period high for a bullish candlestick.
Traders develop trading patterns which they watch to detect continuation and reversal in trends. These charts are popular mainly for their visual nature.
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