Definitions
- What is Candlestick chart?
- Candlestick Chart is the most popular style
- How to read Candlestick Charts?
- Example of candlestick chart
What is Candlestick chart?
- Candlestick charts provide a quick visual picture of the relationship between opening and closing prices and their relative strengths or weaknesses, especially for extended periods. The body, which looks like a candle, represents the difference between opening and closing prices. Shadows, which look like wicks, represent price action above and below the body.
- A form of Japanese charting that has become popular in the West. A narrow line shows the day’s price range. A wider body marks the area between the open and the close. If the close is above the open, the body is green or blue; if the close is below the open, the body is red.
Candlestick Chart is the most popular style
The most Forex experts claim that analysis of the market with the candlestick chart is the most interesting and effective method. Candlestick chart is similar to the bar chart.
They both give the same information about the price.
However, two-dimensional candlesticks due to their appearance and color create special impression, and show the movement of the market prices.
Besides visual effect, candlestick chart improves the memorization.
How to read Candlestick Charts?
Candlesticks are formed on the same data as the bar chart: the opening price, high, low and closing price.
The rectangle is called the body and represents the price range between the open and close of the trading session.
- If the body is black (or other) color – the closing price was lower than the opening price.
- If the body is white – the closing price was higher than the opening price.
Minimum and maximum price of trading session are marked by thin lines above and below the body and are called shadows.
Highest point of the upper shadow indicates the maximum price during the session, and the lowest point of the bottom of the shade – the lowest price of the session.
The shadows give chart the graphic similarity with candles.
Experts argue that the body of the candle represents the most significant fluctuations of price, and the shadows show less important.
The color scheme of candles can be different, it depend on the settings of Metatrader but historically concerning the Japanese traditions “Yin” – called the black candle, “Yan” – white.
Example of candlestick chart
Depending on market conditions the main thirteen types of candles can be formed on bull, bear or transitional market.
Using the three basic principles of analysis: the power of the body, the strength of the shadows, the power of denial you can understand the emotional state of the market and to predict the direction of its development.
The length of the body shows the intensity and extent of price changes.
The longer body of candle shows the more active desire to move in a particular direction. White candles express the growth of the market and the prevalence of bulls, long black candles show decline and the prevalence of bears.
The length of the shadow reflects uncertainty.
The longer shadow of candles expresses the greater uncertainty of traders and the ability to change direction: long upper shadows – tell us that bulls aren’t able to fix the market price at new level, and soon bears will try to win back the lost ground.
Long lower shadow shows the contrary.
If candles have small bodies and long shadows, this phenomenon is called the “market spikes”, in a short period of time the market will turn around.