Today, the stock trading strategy we are going to discuss the topic of Candlesticks. When looking at a chart we need to determine which type of charts we want to use. There are many different choices that we can use including line charts, bar charts, range charts and candlestick charts. Candlestick charts seem to be one of the more common types of charts used and one that you should at least be somewhat familiar with.
As traders, we need become familiar with the type of charts we are going to be using in order best understand what the charts are trying to tell us. By choosing one type of chart it can make reading the charts a bit easier.
The candlestick charts have been around since the 18th century and are thought to originate with Japanese rice traders. From then until now the use of candlestick charts have evolved into an elaborate way to identify trading opportunities. These ways include individual candlestick patterns and multiple candlestick price patterns.
In looking at an individual candlestick you will see commonly used data that forms the candlestick itself. Take a look at the pictures below to see how these are formed.
Notice that each candle, both the up and down candles, have a body which is a solid rectangle. They each also have what is called a wick or shadow. The body of the candlestick show where the price opened and where it closed. For an up candle (green) the open is at the bottom of the body and the closed price is at the top of the body. For a down candle (red) the open is at the top of the body and the closed price is at the bottom of the body. The wicks are the same for both the up candle and down candle, the top of the wick or shadow is the high price and the bottom of the wick or shadow is the low price for the candle.
Each candle represents a specific time period. Candlesticks generally range from 1 minute to 1 months. This means that the candles can look a lot different depending upon the time frame used.
In addition, candlestick can give traders an idea of the momentum or lack of momentum for the given time period. Take a look at the picture below to see how the different momentums can look with candlesticks.
With lots of momentum you can see large bodies created and with little momentum you can see small bodies. This can give the trader an idea of the amount of interest in a certain currency pair. You can also identify when there might be lots of volatility for a specific time by looking at the size of the wicks or shadow. Take a look at the picture below to see how this might show up on a candlestick.
With these candlesticks you can see that there was lots of movement without much change in price. This might indicate that there was lots of volatility happening for that specific time period.
Candlesticks may or may not be for you but now you have an idea of what they are and how you might use them. Take some time to practice with them to see what you think.