The extensive range of information offered by candlesticks has made them a popular chart option for a lot of traders. As compared to other types of charts, a chart with candlesticks is also easy to interpret and read. If you are planning to bring your A-game to trading, understanding candlesticks is very important.
Ask any professional technical trader, and they’d agree that charts play a very important role in their trading decisions. But just like most of the trading tools, there is a lot more to reading a stock chart than simply looking at a graph moving up and down.
Why Candlesticks?
Technical traders use many different types of charts to pick profitable trades. But as compared to all the different types of charts, candlesticks are one of the most popular. One important reason for this is the amount of information that a candlestick can provide. For instance, while a simple line chart usually only gives you the close price of a stock at a particular time, a candlestick offers five different details- open, close, high, low, and movement direction.
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If you want to excel as a trader, candlesticks are one thing that you should know like the back of your hand. To help you begin, we’ve listed a few important points about charts made from candlesticks.
Understanding a Candlestick
A candlestick has two important parts – the body and the wick or shadow. If a stock closes higher than where it opened within a time frame, the body of the chart is green. Similarly, if the price falls below the opening price, the body of the chart is red.
The wicks or shadows on top or below the body tell you the highest and lowest price of the stock within the time frame.
The time frame of the Candles
The charts can be viewed in many different time frames for a holistic view of the stock trend. Based on your strategy, you can select a long-term interval like weekly or daily charts or you can select a short-term interval like an hour or even one minute.
Usually, a trader views these charts across many different time frames before placing a trade.
Long body and Short Body
Normally, the longer the body of a candle is, the higher is the buying or selling pressure. On the other hand, smaller candles represent consolidation and lower price movement. If it is a long green candle, it means a strong buying pressure, and in case of a long red candle, there is more pressure from the sellers.
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While long green and red candles can determine the bullish or bearish nature of a stock, the position of such candles and the time frame you select provides a better idea of the price action.
Long and Short Shadows
The wicks or shadows above the below the body of a candle also provides valuable information. If the shadow is short, it suggests that most of the trading took place near the open and close price of the stock within that time frame.
If the shadow is long, it means that the price extended well above and below the open and close price.
Candlestick Patterns
There are many popular candlestick charts patterns, like Doji, Hammer, Harami, Spinning Tops, Evening Star, etc. While these patterns can help you estimate the next candle to an extent and place trades accordingly, it is not really necessary to understand or remember them.
This is because when you truly understand why the candle is representing the battle between bulls and bears, you don’t really need to know the pattern. Simply try to understand why a candle looks the way it does, and you’d still be able to make excellent trading decisions.
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Using candlestick charting to get a feel of where a stock is headed would require you to learn this interesting and unique charting language. The technical analysis can help you get an idea of the trend so that you can capitalise the next move.