Understanding Charts and Candlesticks
Technical analysis is the process of predicting the future movement of stock prices based on the study of past stock price movements. These predictions are not absolute but can help investors foresee what may happen to stock values over a given period of time. There are a great many charting systems in use to conduct technical analysis on market movement and trends.
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One form of charting is known as Japanese candlestick charts and these types of charts are versatile enough to be used in long-range forecasting or day trading scenarios. The real power of candlestick charts is in their ability to accurately show market turning points and when used correctly market risk exposure is dramatically reduced.
What are candlesticks?
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Candlestick charts, so called because of their resemblance to candles have been in use and perfected in the Far East for generations. These types of charts are now used worldwide by all kinds of investors from day traders to premium financial institutions.
Candlestick charts are very easy to interpret and understand. Seasoned traders right down to new investors can easily read and understand the information in a candlestick chart.
These charts can also indicate earlier market turning points, therefore allowing the investor to enter or exit the market with more accurate timing. Western tools for charting price movement will only show trends, but combining western and eastern methods will give you both these benefits. Unique insights in the market can be read from these charts by showing the force that is supporting the movement of the trend, unlike bar charts that only show the trend.
How to read a candlestick chart
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The thickest section of the candlestick is called the real body. It shows the range between the open and closing price of the stock. The real body can be one of two colors, usually black and white. If the opening price is higher at closing than the closing price the real body will be black and if the closing price is higher than the opening price it will be white.
The length of the real body also factors in the analysis of candlestick charts. If the real body is long and white it shows at a glance that it is a bull market. If the real body is long and black it shows a bear market. A short real body, white or black, shows that the market’s trend may be losing its momentum. If the real body shortens to a single line, this is known as a Doji, which just means that the open and close are the same and therefore nobody.
The small tails protruding from each end of the real body, commonly known as wicks, are called shadows. The highest point of the upper shadow denotes the high of the period and likewise, the lowest point of the lower shadow shows the low of the period.
When using candlestick charts you can employ western or eastern techniques, or combine the two for an effective forecasting tool that will assist in increasing profits and decreasing risk. A Japanese proverb states “His potential is that of the fully drawn bow – His timing the release of the trigger.” Candlestick charts are one method that can be used to factor that “timing” in making the correct decisions when trading on the financial markets.
My two favorite Books on Candlestick charts are (Linked to http://amazon.in)