Candlestick Trading

Candlestick Trading
Candlestick chart analysis can be used for trading forex, CFDs, stocks, indices, commodities or any other financial instrument.

Candlestick chart analysis has become increasingly popular among traders worldwide to identify trading opportunities. It is by far the most commonly used technical analysis tool, which helps to identify patterns in historical price movements to predict future movements. The reason for its immense popularity is that candlestick charts provide more detailed information about the market in a very simple way. Candlestick patterns are easier to analyse, while packing in data across multiple timeframes into a single chart.

Candlestick chart analysis can be used for trading forex, CFDs, stocks, indices, commodities or any other financial instrument.

Looking Back 100 Years

Interestingly, candlestick charts originated more than a century back, in Japan. In the 1700s, a rich Japanese merchant named Munehisa Homma invented the candlestick chart to trade rice. While there is a link between price and demand for a commodity, markets are also heavily influenced by emotions. Homma, now considered the father of candlestick charts, wanted a method that could incorporate the impact of emotions by visually representing the extent of price movements.

Understanding the Components of Candlestick Chart Analysis

To master candlestick analysis, it’s important to first understand the components of the charts. The chart is made up of several candlesticks.

Each candlestick depicts four price points:

  • Open
  • Close
  • High
  • Low

So, a daily candlestick shows the market’s open and close price for the day, as well as the highest and lowest price recorded on that day.

The wide part of the candlestick is known as the “real body.” The length of this shows the price range between the open and close price of that day's trading.

  • If the close price was lower than the open price on that day, the real body is coloured black or red. This represents a bearish candle.
  • If the close price was higher than the open price on that day, the real body is left empty or coloured green. This represents a bullish candle.

There are two thin sticks above and below the real body. The one above is called the Upper Shadow, while the one below is known as the Lower Shadow.

  • Upper Shadow: Depicts the high of the day and the close (bullish candle) or open (bearish candle)
  • Lower Shadow: Depicts the low of the day and the open (bullish candle) or close (bearish candle)

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Basic Candlestick Patterns

Price movements may appear random at first. However, using candlestick charts, it’s possible to identify patterns in these movements. Traders can use these candlestick patterns for analysis and placing trades. There are several candlestick patterns, they can be broadly categorized as:

  • Bullish patterns: These indicate that price is likely to rise
  • Bearish patterns: These suggest that price may fall.
The most commonly used candlestick patters are:
  • Engulfing Pattern
  • Evening Star
  • Morning Star
  • Shooting Star
  • Harami
  • Harami Cross
  • Bullish Rising Three
  • Bearish Falling Three
  • Dark Cloud Cover
  • Doji
  • Doji Evening Star
  • Hammer
  • Hanging Man
  • Hammer Morning Star
  • Piercing Pattern
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