Candlestick Charts – An Introduction to Candle Stick Charts.
A candlestick chart is a price chart typically depicting the behavior of a forex pair over a specific period of time. It can be made for an hour, a day or even a month, but it works best if it is used for short term technical analysis. It can give you a complete picture of a currency’s price history over a period of time.
History
Candlestick charts were first used as early as 1700, by rice traders in Japan. It is said to have been developed by the Homma Munehisa, a rice trader. It became very popular because understanding it was very simple and easy. Till date, it still acts as a very reliable tool in predicting the future price direction of the investment. The method was also used by Charles Dow in the early 19th century and is one of the most widely used chart patterns in forex trading today.
Analysis
Candlestick charts are used by traders as they are visually appealing and are easier to interpret when compared to other types of charts. By just looking at it, a trader can establish the relationship between its opening and closing price, as well as high and low prices, in that time period. White/green candles signify that the close is higher than the opening price thereby, indicating a buying pressure for the currency. On the other side, if the candle is black/red, it shows that the close is below its opening price and signifies a selling pressure.
Candlestick charts are preferred over bar charts. This is because they employ two dimensional bodies to depict the intraday movement of the currency unlike the traditional bar charts which have just the single line. Analysts have identified some specific patterns of candles which help them to determine the future short term trend of a particular currency pair. These specific pattern formations of charts help the investors to decode the market sentiment.
Candlesticks make reading the price action easier and help speculators to better understand the market sentiment. Its main emphasis lies in the relationship between the opening and closing price. It incorporates traders to predict the reversals or continuation of trends much faster which is considered to be the most difficult part of the trading. It can be even more useful when combined with other technical indicators to get the information about the various entry and exit points.
One Candle Patterns
The simplest type of candle formations is known as the “Umbrella Lines.” These lines are considered to be simple because they do not need to be combined with other candles to have validity. The only criterion for them is that their shadows should be at least twice the size of their body and their real body should be small.
