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Candlestick Charts for Beginners
In this article you will learn how to interpret candlestick charts for beginners to take advantage of the information they provide for traders and investors.
What exactly is a candlestick chart?
A candlestick chart is a type of financial chart that graphically represents an asset’s price movements over a specified timeframe. It’s made up of candlesticks, each representing the same amount of time, as the name suggests. Candlesticks can represent almost any time period, from seconds to years.
Candlestick charts have been around since the 17th century. Homma, a Japanese rice trader, is often credited with inventing them as a charting tool. His ideas are most likely what laid the groundwork for the modern candlestick chart. Many people refined Homma’s findings, most notably Charles Dow, one of the fathers of modern technical analysis.
While candlestick charts can be used to analyze any type of data, they are most commonly used to aid in financial market analysis. When used correctly, they are tools that can assist traders in determining the likelihood of price movement outcomes. They can be useful because they allow traders and investors to form their own ideas based on market analysis.
How do candlestick charts work?
Each candlestick requires the following price points:
This data set is commonly referred to as the OHLC values. The candlestick’s appearance is determined by the relationship between the open, high, low, and close.
The body is the distance between the open and close, while the wick or shadow is the distance between the body and the high/low. The range of the candlestick is the distance between the high and low points of the candle.
How to Interpret Candlestick Charts
Even though they provide similar information, many traders believe candlestick charts are easier to read than bar and line charts. Candlestick charts are easy to read and provide a straightforward representation of price action.
In practice, a candlestick depicts the battle between bulls and bears over a specific time period. In general, the longer the body, the greater the intensity of buying or selling pressure during the measured timeframe. If the candle’s wicks are short, it means that the measured timeframe’s high (or low) was close to the closing price.
The color and settings may differ between charting tools, but if the body is green, it means the asset closed higher than it opened. The color red indicates that the price fell during the timeframe being measured, so the close was lower than the open.
Some chartists prefer black-and-white illustrations. Instead of using green and red, the charts use hollow candles to represent up movements and black candles to represent down movements.
What candlestick charts don’t tell you
While candlesticks can provide a general idea of price action, they may not be sufficient for a comprehensive analysis. Candlesticks, for example, do not show what happened in the interval between the open and close, only the distance between the two points (along with the highest and lowest prices).
For example, while the wicks of a candlestick can tell us the high and low points of the period, they cannot tell us which occurred first. Nonetheless, most charting tools allow traders to change the timeframe, allowing them to zoom into lower timeframes for more details.
Candlestick charts can also contain a significant amount of market noise, particularly when charting lower timeframes. The candles can change rapidly, making them difficult to interpret.
So far, we’ve talked about what’s known as the Japanese candlestick chart. However, there are other methods for calculating candlesticks. One of them is the Heikin-Ashi Technique.
In Japanese, Heikin-Ashi means “average bar.” These candlestick charts are based on a modified formula that employs average price data. The primary goal is to smooth out price movement and remove market noise. As a result, Heikin-Ashi candles can help you spot market trends, price patterns, and potential reversals.
Traders frequently use Heikin-Ashi candles in conjunction with Japanese candlesticks to avoid false signals and increase the likelihood of detecting market trends. Green Heikin-Ashi candles with no lower wicks indicate a strong uptrend, whereas red candles with no upper wicks may indicate a strong downtrend.
While Heikin-Ashi candlesticks can be a powerful tool, they do have limitations, just like any other technical analysis technique. Patterns may take longer to develop because these candles use averaged price data. Furthermore, they do not display price gaps and may obscure other price data.
Candlestick charts are an essential tool for any trader or investor. They not only provide a visual representation of a given asset’s price action, but also the ability to analyze data across multiple timeframes.
A thorough examination of candlestick charts and patterns, combined with an analytical mindset and sufficient practice, may eventually provide traders with a competitive advantage. Nonetheless, most traders and investors agree that other methods, such as fundamental analysis, should be considered.
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