The Basics of Candlestick Charts
When it comes to trading forex or anything else, one of the most useful tools that you could possibly use are candlestick charts. Now, candle stick charts have been around for literally hundreds of years, and they are no less useful now than they were when they were first invented.
The fact of the matter is that if you want your life in the world of four of trading an stock market training to be as easy as possible, then knowing exactly what Candlestick charts are, what they tell you, and how to place trades based on the patterns they provide you with, is extremely important.
What we’re here to do today is to provide you with an introductory guide to the basics of Candlestick charts. By the end of this article, we hope that you will know exactly what these Candlestick charts are, what they tell you, and how to read them. We will then also be doing a follow up to this article with another one where we will discuss all of the most common and basic Candlestick chart patterns that you may encounter.
What are Candlestick Charts?
Alright, so first and foremost, these candle stick charts were first invented in Japan all the way back in the 1700s. They were invented by a man who noticed that there was a relationship between the price of rice as well as its supply and demand. Therefore, these charts were invented in order to provide a visual reference in terms of what this price is like.
So, candle stick charts are a special type of chart that are used for many different types of trading, and they’re all about determining the possible price movements based on the patterns that the panel sticks create. Now, one of the most important things that you need to know here is that candle stick charts provide you with four separate pieces of information. These four pieces of information include the highest price that something traded at comment the lowest price, the opening price, and the closing price.
Because these Candlestick charts provide us with so many different pieces of information, they are often seen as some of the best trading tools around. Of course, in order for you to identify candle stick patterns, you do have to be able to identify the various components of individual candle sticks. So, what we are going to do now is to move on and provide you with all of the information that you need in order to read candle stick patterns.
The Main Parts of a Candlestick
Before we talk about the actual components of these candle sticks, let’s just remind you that the components provide you with four pieces of information, including both the opening and the closing price of a day, as well as the highest and the lowest price traded at during the day.
Now, when it comes to identifying these various components on a candle stick, what you need to know is that the largest and widest part of the candle is known as the real body. Now, if the real body is either totally black or filled in, it means that the closing price was lower than the open, and if the real body is either empty or white, it means that the closed was higher than the open. Do keep in mind that sometimes upwards candles are faded green instead of white, and downwards candles can be shaded red instead of black.
The other important component of these candle sticks that you need to know about are known as the shadows, or sometimes referred to as the wicks of the candles. The upper wick that points upwards represents the highest price that said asset was traded after during the day, and the lower wake represents the lowest price point. Once you know what the real body and the wicks of the candles represent, you can then move onto identifying the various patterns that these candle stick charts create.
Advantages and Disadvantages of Candlestick Charts
Let’s take a quick look at all of the advantages and disadvantages that come along with using these Candlestick charts for trading.
- The fact that these charts provide you with four different pieces of information in a very easy to read manner is of course a huge bonus.
- Candle stick charts are extremely easy to read due to their aesthetically pleasing nature. Therefore they are awesome for beginners to use.
- The fact that charts are infinitely customizable, with a single candle stick being able to represent any period of time for any asset is another big bonus.
- Candle stick charts are actually extremely accurate.
- When it comes to identifying who is in control of the market, as well as what market sentiment is like, these charts are some of the best tools that you could possibly use.
- Also keep in mind that virtually any and every indicator works well with these charts.
- One big disadvantage of Candlestick charts is that many people suffer from what is called apophenia, which is a bias that often leads people to see patterns where none actually exist.
- Although these charts are awesome, do keep in mind that price data alone is usually not enough to place extremely safe trades. You do want to use indicators in combination with these candle stick charts.
- Candles may also have gaps in between one candle and the next, which may leave you wondering what happened in between.
An Example of a Common Candlestick Pattern
Just to provide you with a basic idea of what you are looking out for, let’s take a quick look at one basic Candlestick chart pattern that you will see a whole lot of. Technically speaking these are two separate Candlestick chart patterns, the bearish engulfing pattern and the bullish engulfing pattern.
The bearish engulfing pattern sees along red real body that engulfs a smaller green real body. This pattern usually happens in an uptrend when there are more sellers than buyers, and indicates that the sellers are in control, with the price likely to continue its decline.
On the other hand, we have the bullish engulfing pattern, and you here you will see a long green real body that engulfs a small red real body. This generally happens in a downtrend, when the buyers outnumber the sellers, and it shows that the bulls have established a certain amount of control in the market, with the price likely to continue its ascent.
All About Candlestick Charts – The Bottom Line
The bottom line here is that if you know exactly what candle stick charts are and how to read them, they can provide you with all whole lot of information that will allow you to place profitable trades on a consistent basis.
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