- A candlestick chart represents the price movement of the stock over a certain period of time.
- These charts are popular with traders because they are easy to read and understand.
Components of a candlestick chart
- A candlestick will offer a wide range of information in a simple manner.
- Each candlestick is composed of a body and wicks (thin lines extending above and below the body).
- A positive candle will have a high, a low, an upper shadow with a close, a lower shadow with an open, and then a low.
- A negative candle will have a high, a low, an upper shadow with an open, a lower shadow with a close, and then a low.
- A green candle is formed if the close is above the open.
- A red candle is formed if the close is below the open.
- The space between the open and close points is depicted as the BODY.
- The thin lines that extend from the top and the bottom are known as wicks or shadows.
- The top of the upper wick will represent HIGH.
- The bottom of the lower wick will represent LOW.
How do you read the candlestick chart?
- A candlestick chart includes the open, close, high, and low price of a stock over a specific time frame.
- This time frame can be fixed by the trader as per his requirement.
- For example, if the time limit is fixed at ten minutes, then a new candlestick is created in the graph after every ten minutes.
- Then, by simply looking at the chart, the trader will be able to find out all four major price movements of the stock over a particular time frame.
Candlestick chart analysis
- It is very important that the candlestick not just be observed in isolation.
- The context is very crucial when it comes to the candlestick analysis.
- The trader must observe the previous candlesticks and also observe how they have changed over time.
- Has the body of the candlestick become larger or smaller?
- What about the wicks or the shadows?
- How have they changed?
- These are the main questions that every trader is supposed to ask himself as he analyzes the candlestick chart.
- This is because when the real body of the candlestick becomes larger, it will indicate an increase in the momentum.
- The body of the candle shows how much the price of the stock has changed over the duration of the time frame.
- A long white candlestick will represent bullish strength, while a long black candlestick will represent a bearish strength in the market.
Conclusion
With understanding the candlestick chart, you should also learn about the risk management techniques as well as the intraday trading strategies.
Frequently Asked Questions (FAQs)
Q1) What is the candlestick chart analysis?
Candlestick charts are most often used in technical analysis of equity and currency price patterns.
Q2) What is the candlestick chart pattern for bullish?
Hammer is the candlestick chart pattern for bullish.
Q3) What is a 3 candle rule?
The 3 candle rule states that the 1st candle is a bearish one, the small 2nd candle is bullish, which will also mark the trend change, and the 3rd candle is a strong bullish one.
Q4) What is a 5 candle rule?
The 5 candle rule states that it is a trading strategy where the traders will wait for 5 consecutive candles to confirm the trend or pattern before making any sort of trading decision.
Q5) Which candlestick chart is the best?
The Doji candlestick chart is the best.
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