Understanding how to read candlestick charts is necessary for both stock trading and foreign FOREX trading. Candlesticks are a record of changes in price that may help a trader to identify trends and spot imminent breakouts and reversals or retracements. Many traders are able to develop worthwhile trading systems, such as AI Forex Robot, about wholly on the premise of candlestick charts, and many more systems rely on them as a first or primary signal.
The chart is made from a series of blocks or candles, every one showing the open, close, low and high costs over a period. These can be prices of anything : stocks, commodities, currencies or whatever. The open and close prices could be the prices for a day’s trading but in most cases you have command over the period and you can set your chart to show a candle for each hour, for 5 minutes or whatever. If you’re planning systems around this kind of chart you will probably want to test your signals over more than one time period before you open a trade.
If shown in monochrome, the candle will be unshaded or white for an amount that rose during the period. In this situation the open price is the bottom of the candle’s wide block and the close price is the top of the block. If the price fell in the period, the body of the candle will be shaded, either black or a color. In this example naturally the higher edge of the body is the open price and the lower edge is the close.
In either case, the high during the period is the pinnacle of the vertical line or wick stretching upward from the pinnacle of the block. The low in the period is the base of the vertical line or wick running down from the base of the block.
Some charts nowadays are shown in two colors. You may have green or blue for a bullish period when the price was rising and red for a bearish period when the price was falling.
The beauty of candlesticks is that you can see the direction of price movements at a glance. Not only do you see if the candle in total is above or below the prior one, but you may also tell by the colours whether it marked a reversal or a continuation of the trend.
Certain patterns are particularly vital in learning how to read candlestick charts.
In some cases naturally the open or close will be the high or the low. In that case you don’t have a wick in one or both directions. If there is no wick in either direction, this is referred to as a Marubozu pattern.
In another case, the opening and closing costs could have been the same. Then there is no candle body but only wicks stretching up and down from the horizontal line that marks the open and close. This is called a Doji pattern.
If the body of the candle is long with short or non existent wicks, close to Marubozu, this indicates a fairly steady movement, possibly part of a trend. The colour of the candle will tell you if it is an upward or downward movement.
On the other hand if the wicks are long and the body is short or non existent, more like the Doji pattern, this will indicate a troubled market with big fluctuations. Trend based trading will have a tendency to be suspicious of Doji patterns, which may be a sign the market is becoming untrustworthy.
of course one candlestick on its own isn’t enough to form the foundation of a trading call. You will always look at a sequence of candles. For example, you can draw trend lines along the highest highs and lowest lows on candlestick charts. These will help you to identify whether a trend is forming, or if the lines are converging, whether a breakout may be anticipated. When you know how to read candlestick charts you can base systems around these suggestions.
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