Reading charts can be difficult if you’re new to investing or trading. Others rely on their intuition and invest money based upon it. This strategy might work temporarily in bullish times, but it won’t work long-term.
Trading and investing are essentially games of risk management and probability. For almost all types of investing, it is essential to be able to read candlestick charts. This article will describe what candlestick charts are, and how to read them.
What is a Candlestick Chart?
Candlestick charts are a type financial chart that visually represents the price movement over a certain period of time. It is composed of candles that represent the same time period as the name. You can use candles to represent any time period, from seconds to years.
Candlestick charts date back to the 17th century. A Japanese rice merchant named Homma is often blamed for their creation as a visual tool. These ideas are the foundation of modern candlestick charts. Charles Dow, one the fathers in modern technical analysis, has refined Hommas’ ideas.
Candlestick charts can be used for analysis of any type of data but they are used primarily to aid in the analysis of financial markets. These tools can be used to help traders determine the likelihood of price movements. These tools can be very useful because they allow investors and traders to formulate their own ideas based upon market analysis.
What is the purpose of candlestick charts?
The following price points are required to create each candle:
- Open The initial market value for an asset during a specified time period.
- High This is the high market value for an asset recorded during this time period.
- Low. This is the lowest traded price for an asset during a particular time period.
- Close The last recorded trading prices for an asset during a specified time period.
This dataset is commonly referred to collectively as OHLC values. What a candle looks like depends on how it is related to opening, closing, high, low and closing.
The body is the distance between opening/closing and the minimum/maximum of the candle is the shadow. The wick or wick is the distance between the body (or body) and the maximum/minimum of the candle is the shadow. The candle range is the distance between the maximum candle and the minimum candle.
How to read candlestick charts
Candlestick charts are often easier to understand than traditional line and column charts. Candlestick charts are easy to read, and give a quick overview of price action.
In practice, the candle shows the battle of bulls and bears for a certain period. Correctly, the longer the body, the stronger the buying or selling pressure was during the measured time period. If the wicks on the candle are short, it means that the high (or low) of the measured timeframe was near the closing price.
The color and settings may vary depending on the charting tools, but usually, if the body is green, it means that the asset closed higher than it opened. Red means that the price moved down during the measured timeframe, so the close was lower than the open.
Some graphic artists on the use of black and white images. Therefore, along with green and red on the graphic indications of an upward movement with hollow candles and a downward movement with black candles.
What Candlestick Charts Don’t Tell You
While candlesticks are useful as they give you a general idea of price action, they may not provide everything you need for a comprehensive analysis. For example, candlesticks don’t show in detail what happened between the open and close, only the distance between two points (along with the highest and lowest price).
Candlestick wicks can tell us the maximum or minimum time period but not which one occurred first. The majority of charting tools allow traders to change the timeframe, which allows them to trade at lower timeframes to get more information.
Candlestick charts can contain lots of market noise, particularly when plotting charts over shorter time periods. It is possible for candles to change quickly, making them difficult to understand.
We’ve already discussed the Japanese candlestick charts. There are many other methods to calculate candles. One of these is the Heikin-Ashi method.
Heikin-Ashi, in Japanese, means medium bar. These candlestick charts are created using a modified formula which uses average prices. The goal is to smoothen out price action and remove market noise. Heikin-Ashi candlesticks are able to identify market trends, price patterns, and potential reversals.
To avoid false signals and improve the chance of detecting market trends, traders often combine Heikin-Ashi candlesticks with Japanese candlesticks. A strong uptrend is usually indicated by green heikin-ashi candles with lower wicks. Red candles without higher wicks may indicate a weak downtrend.
Haikin-Ashi candles are a powerful tool for technical analysis like any other. However, they do have some limitations. These candlesticks are based on average price data so patterns may take longer to form. They do not display price gaps and can conceal other price data.
Candlestick charts are a fundamental tool for investors and traders. They provide an easy way to visualize the price movement of an asset and allow you to analyze data over different time periods.
Traders can gain an advantage over the market by combining extensive study of patterns and candlestick charts with sufficient practice and an analytical mindset. All investors and traders agree that fundamental analysis is important as well.