HOW TO READ CANDLESTICKS IN TRADING – INTRODUCTION FOR BEGINNERS
Candlesticks or Japanese Candlesticks are a type of price chart used to represent the movements in the price of a stock, currency or commodity. It is an integral part of the technical analysis for forex and securities trading. The chart is known as candlesticks chart as the data is represented using the shape of a candlestick. These charts are packed with information and represent the trading patterns during a specified period of time accurately. They are also instrumental in providing insights on the psychology of the market. This is why they are largely used for analysis of currencies, equities and derivatives.
Anatomy of a Candlestick
A candlestick defines four points or price levels of a stock or currency – the opening, closing, highest and lowest price levels.
Parts of the Candlestick:
1. Body: The filled or hollow box portion of the candlestick is called its body. The top and bottom of the body represent the closing and the opening value of the stock. When the closing price of the commodity is higher than the opening price, the top of the body represents the closing value and the bottom is representative of the opening value, and vice versa.
2. Tail: The two vertical lines extending out from the top and the bottom of the body are called tails, wicks or shadows. The top-most part of the upper tail represents the highest price level of the stock. Similarly, the bottom of the lower tail represents its lowest price level.
ANATOMY OF A CANDLESTICK
The Length of the Body:
The length of the body indicates the trading activities in the stock. While a longer body is an indication of strong buying or selling, a shorter body indicates that there has been little buying or selling activity.
The Colour of the Body:
The body of the candlestick might be coloured or non-coloured. When the closing price of the stock is higher than its opening price, the gain is represented by a clear or a white candlestick body. Alternatively, when the closing price is lower than the opening price, the loss is represented by a black-bodied candlestick. Thus, a bullish candlestick is white in colour, while a bearish one is black.
In some cases, the candlesticks might also be coloured green or red. Green candlesticks represent an upward movement of the stock from the previous position, whereas, a red candle represents a downward movement.
The Length of the Tail:
The length of the tail provides information regarding the action throughout the trading session. Shorter tails depict that the trading was somewhat confined to the opening and the close of the market. On the other hand, longer tails depict that the price changes extended beyond the open and close.
There are many types of candlestick patterns that depict different trading scenarios and price levels. However, there are four main types:
- The normal candlestick – Candlesticks with both tail and body.
- The Marubozu – Candlestick with a body but with no or only one tail.
- The Doji – Candlestick with no body, only tails.
- The Harami – Candlestick pattern formed by a large and a small candlestick.
DIFFERENT TYPES OF CANDLESTICK PATTERNS
Candlestick charts are one of the most used analysis techniques by enthusiastic traders around the world. They are easy to learn and do not require months to master. With sound knowledge of candlesticks, one can easily understand profit potential and steer away from risky situations.