How To Read Candlestick Charts
Understanding how to read candlestick charts is necessary for both stock trading and foreign fx trading. Candlesticks are a record of price movements that may help a trader to identify trends and spot imminent breakouts and reversals or retracements. Many traders are able to develop profit-making trading systems, like AI Forex Robot, virtually totally on the premise of candlestick charts, and many more systems depend on them as a first or first signal.
The chart is made up of a series of blocks or candles, every one showing the open, close, low and high prices over a period. These can be costs of anything : stocks, commodities, currencies or whatever. The open and close prices could be the costs for a day’s trading but mostly you have command over the period and you can set your chart to show a candle for each hour, for 5 mins or whatever. If you are coming up with systems around this kind of chart you’ll doubtless wish 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 a price that rose in the period. In this example the open price is the bottom of the candle’s wide block and the close price is the head of the block. If the price slipped during the period, the body of the candle will be shaded, either black or a color. In this case of course the upper edge of the body is the open price and the lower edge is the close.
In both cases, the high during the period is the apex of the vertical line or wick stretching upward from the top of the block. The low during the period is the bottom of the vertical line or wick running down from the base of the block.
Some charts these days are shown in 2 colours. You might 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 peek. Not only do you determine if the candle as a whole is above or below the previous one, but you can also tell by the colors whether it marked a reversal or a continuation of the trend.
Certain patterns are particularly vital in learning 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 called 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 reasonably steady movement, possibly part of a trend. The color of the candle will tell you whether or not 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 could indicate a unsettled market with big fluctuations. Trend based trading will tend to be suspicious of Doji patterns, that may be suggestive that the market is starting to become unreliable.
of course one candlestick on its own is not enough to form the basis of a trading decision. You will always look at a series of candles. For example, you can draw trend lines along the highest highs and lowest lows on candlestick charts. These will help you to spot whether a trend is forming, or if the lines are converging, whether a breakout may be expected. When you know the way to read candlestick charts you can base systems around these prospects.
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