The price of a stock, currency, or commodity can be depicted on a chart using candlesticks, also known as Japanese Candlesticks. It’s a crucial part of technical analysis for foreign exchange and stock trading.
Since the data is depicted in the form of a candlestick, the chart is commonly referred to by that name.
These charts are very informative and accurately depict the trends in trading activity over a given time period. They also play a crucial role by shedding light on the market’s underlying psychology.
Because of this, they see widespread application in the study of foreign exchange, stocks, and derivatives.
What Makes a Candlestick Tick
The opening, closing, highest, and lowest prices of a stock or currency are all defined by a single candlestick.
Candlestick Components:
- The Body: The candlestick’s filled or hollow box section is referred to as the body. The opening price of the stock is at the top of the body, and the closing price is at the bottom. If the commodity’s closing price was higher than its opening price, the upper part of the body would represent the closing value and the lower part would represent the opening price, and vice versa.
- The Tail: Two tails, wicks, or shadows protrude from the top and bottom of the body and are referred to by these names. The peak of the upper tail is the highest point the stock ever reached. The lowest point of the lower tail is also the lowest price.
Anatomy of Candlesticks
Dimensions of The Body:
The volume of trading activity in a stock is represented by how long the body is. An extended candlestick body is indicative of robust buying or selling, while a narrower one suggests low volume.
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Color of The Body:
Candlesticks may have colored or uncolored bodies. A clear or white candlestick represents a gain when the stock’s closing price is higher than its opening price. Conversely, a black-bodied candlestick indicates a loss when the closing price is lower than the opening price. So, a white candlestick indicates a bullish market, while a black candlestick indicates a bearish one.
Candlesticks can be found in a variety of colors, including green and red. When looking at candlestick charts, an upward movement of the stock from the previous position is represented by a green candle, while a downward movement is represented by a red candle.
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Length of The Tail:
The length of the tail reveals trends in the trading session as a whole. It can be inferred from shorter tails that trading activity was concentrated around market opening and closing times. However, tails with more length indicate that price movement occurred outside of the open and close.
Patterns Seen in Candlesticks:
Different trading situations and price ranges can be represented by a wide variety of candlestick patterns. In any case, you can classify them into four broad categories:
- The Normal candlestick: Typical, this candlesticks have both a Tail and a Body section.
- The Marubozu: Candlestick with a body but no or one tail.
- Doji Candlestick: a Candlestick with No Body, only Tails.
- The Harami: formed by one large and one small candlestick.
- Engulfing Candlesticks: It is characterized by a short candle followed by a long candle.
Conclusion:
Among the many analysis tools available to enthusiastic traders, candlestick charts rank among the most popular. You won’t need to put in a year of practice before you see any improvement in your performance. By mastering candlesticks, one can quickly assess the potential for profit and avoid potentially disastrous scenarios.
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