Candlestick charts have their origin in 17 th century Japan. Today, candlestick charts are the preferred tool of analysis for traders and most investors since they provide all the required information at a glance. In this article, you will learn everything you need to master candlesticks patterns like a true professional. As the name suggests, a candlestick chart is made up of so-called price candlesticks.
These candlesticks are made up of different components to describe the price movements of financial instruments.
Two sample candlesticks are shown below. A white candlestick represents rising prices, whereas a black candlestick shows that the price fell during the period.
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Figure: A rising candlestick is shown on the left and a falling candlestick is shown on the right along with the explanations of terms used for individual candlestick components. If we set our charts so that one candlestick corresponds to one day, then we can read the daily fluctuations in the financial market using the shadows of a candlestick. The candlestick body describes the difference between the opening and closing prices for the corresponding time period.
Figure: The trend of candlesticks from the opening price to the closing price is described by the candlestick body. The shadows show the entire fluctuation width. If we line up several candlesticks, we can reproduce the progression of line charts by following the candlestick bodies as shown below. The candle shadows also show the severity of price fluctuations in each case. We, thus, get all the information that is essential for an effective price analysis at a glance. This is why candlestick charts are mostly used for technical analysis these days.
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Figure: If you follow the path of the candlestick prices, you can reconstruct the line charts. Candlesticks offer more information and are the preferred medium for technical analysts. Anyone who knows how to analyse and interpret the so-called candlestick patterns or candle formations, already understands the actions of the financial market players a little better.
Candlesticks can be divided into four elements, where each element reveals a different aspect of the current trading behavior and the prevailing market sentiment. To understand the price and candlestick analysis, it helps if you imagine the price movements in financial markets as a battle between the buyers and the sellers. Sellers bet on falling prices and push the price down with their selling interest.
If one side is stronger than the other, the financial markets will see the following trends emerging:. It is always important to keep this in mind because any price analysis aims at comparing the strength ratio of the two sides to evaluate which market players are stronger and in which direction the price is, therefore, more likely to move.
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The size of the candlestick body shows the difference between the opening and closing price and it tells us a lot about the strength of buyers or sellers. Figure:Left: Long candlestick bodies during the downward and upward trend phases. Sideways phases are usually characterized by smaller bodies. Right: Rising candlesticks are stronger in the upward trend. At the peak, the ratio tilts and a sideways phase is characterized by smaller candlesticks.
The length of shadows helps in determining the volatility, i. For a better understanding of price movements and market behaviour, the first two elements must be correlated in the third element. Figure: There are almost no shadows during the left rising phase, confirming the strong trend. Suddenly long candlestick shadows are visible in the sideways phase; these indicate uncertainty and an intensified battle between the buyers and the sellers. When candlestick shadows increase, it can foreshadow the end of a trend. As far as the position of the candlestick body is concerned, we can distinguish between two scenarios in most cases:.
Figure: From left to right: The size of the candlestick body describes the strength of the price movement. The longer the body, the stronger the impulse. If the candlestick shadows are longer, there is a balance between the sellers and the buyers and the indecision increases. Now that we have covered the individual elements, we can put things together and see how we can use our knowledge to dissect price charts.
In the final example, we can see a classic pattern at the end of a trend. This is also often one of the building blocks to the trading strategy which you can learn in our pro area. With this article we want to show you that you do not have to remember any candlestick formation to understand price. Quite the opposite. Learn how to understand how buyers and sellers push price, who is in control and who is losing control. Your view clarified a lot my understandment in the chart.
Thanks you rolf I feel like i opened my eyes with clear and confident concept of true candle shapes and wick You are the man. I have lost thousands of dollars. I am now afraid to trade. I understand that the market moves when supply equals less than demand market goes up and vice versa.
I am having hard time adjusting the the parameters and stop loss margins. Forex is simply an odds game, Your edge only tells you that there is a stronger probability that one thing will happen over another. There are no guarantees. A good system simply gives you advantages in the market. This is fantastic article.
I helped me a lot to understand candlestick in better way. Thank you. OMG, this was an awesome and easy to understand breakdown of the candles and wicks. Thank you so much! Thank you for the insight Rolf, its very much appreciated. What in your opinion, is the best time frame to use when reading candlesticks? Nice article. Help a lot to understand the thinking of buyers and sellers. At the beginning of trading it was hard to accept, that candles only represents the psychology of buyers and sellers. I hope you can make an article about when to buy or sell that pattern psychologically following this article.
Honestly speaking, i am searching exactly this article. Thank you a lot for clearing confussion about candle stick. The best article on candlestick ive ever read so far.
Most of the articles will teach us the pattern by their names and functions but not really to understand how they tell us the story of price action. Thanks alot Rolf. Soon il be one of your students. Preparing myself for it. Great teachings. I love this article. It is very clear and simple. Rolf, you are a teacher indeed and I love you. Thank You, so helpful, love the information. I have been studying for a long time. Just trying to gather all info so i understand much first.
Very good article. Looks like one world in one candlestick, shows the behavior from buyers and sellers. Candle Care:. Log in or Create account.
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