Well what we do in trading is analysing the stocks right? But how to do that? A tabular representation of the every day values of the stock may help. When we represent the everyday high, low, open and close values of the stock on the table it would be pretty enough to understand the company for trading basis. But I am sure that after some days you will definitely jump out of your chair with both your hands on your head. It is a little awkward to look at the long table containing the society of numbers.
For an ease of understandability, we introduced charts (pictorial representations). I am sure that you are familiar with line charts, bar charts, pie charts, etc from your school onwards. Charts enables us to get all the information in an effective manner.
Well, grab your popcorn and get ready to learn about the quirkiness of candlestick charts – the charming little sticks that illuminate the mysteries of stock price movements!
Let me show the examples of most commonly used charts at first:
Now what we wildly use in the markets is the so called Candlestick charts as it can represent everything we needs precisely and fairly understandably.
Candlestick charts are one of the most popular types of charts used by traders and investors to analyze financial markets. They are a type of bar chart that shows the open, high, low, and close prices of a security over a given period of time. Candlestick charts are easy to read and interpret, and they can provide valuable insights into market trends.
History of Candlestick Charts
Candlestick charts originated in Japan in the 1700s. They were developed by Munehisa Homma, a Japanese rice trader. Homma was looking for a way to better visualize market movements, and he found that candlestick charts provided a more informative and intuitive way to do so.
Candlestick charts slowly gained popularity in Japan over the next few centuries. They were not introduced to the West until the 1990s, when they quickly became one of the most popular types of charts used by traders and investors.
Significance of Candlestick Charts
Candlestick charts are significant for a number of reasons. First, they are easy to read and interpret. The open, high, low, and close prices are all clearly displayed, and the different colors of the candlesticks make it easy to see whether the market was bullish or bearish during a particular period of time.
Second, candlestick charts can provide valuable insights into market trends. By looking at the patterns formed by the candlesticks, traders and investors can get a better sense of where the market is headed. This information can be used to make informed trading decisions.
How Candlestick Charts Help
Candlestick charts can help traders and investors in a number of ways. First, they can help to identify trends. By looking at the patterns formed by the candlesticks, traders and investors can get a better sense of whether the market is bullish or bearish. This information can be used to make informed trading decisions.
Second, candlestick charts can help to identify support and resistance levels (No matter if you don’t know what they are. We will get to it soon). For now just understand support levels are prices where the market is likely to find buyers, and resistance levels are prices where the market is likely to find sellers. By identifying these levels, traders and investors can position themselves to take advantage of potential price movements.
Third, candlestick charts can help to identify trading opportunities. By looking for specific patterns, traders and investors can identify potential entry and exit points for their trades. This information can help to improve the odds of making profitable trades.
What a Candlestick represent?
Before we dive in, let’s picture a candlestick chart as a delicious sushi roll. Yes, we know it’s odd, but just bear with us! Imagine the roll is wrapped in seaweed, and inside, you’ve got all the ingredients you need to make some stock market magic happen!
Now, meet the headliner of our roll – the “body” of the candlestick. It’s like the chubby belly of the sushi roll, representing the opening and closing prices of a stock for a specific time period. When the opening price is lower than the closing price, it’s like the sushi roll had a full-on feast, and you’ll see a green candlestick. Conversely, when the closing price is lower than the opening price, it’s like the sushi roll went on a diet, and voilà, you’ve got a red candlestick!
Oh, but don’t let the story end there! No, siree! Just like a sushi roll with extra flair, we have “wicks” or “shadows” poking out of the top and bottom of the candlestick. Picture these as the toothpick-like chopsticks sticking out, showing us the highest and lowest prices the stock reached during the chosen time frame.
Now, you must be wondering, why in the world do we need these quirky little sticks to understand stocks? Well, here’s the thing – candlestick charts are like the stock market’s version of emojis! They express emotions through simple shapes.
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Limitations of Candlestick Charts
No chart is perfect, and candlestick charts are no exception. They have a number of limitations, including:
- They can be difficult to interpret for beginners.
- They can be misleading if not used correctly.
- They can be used to confirm trends that are already in place.
I only specified this because I was a little jealous with Candlestick charts being perfect on all the ways;)
Conclusion
Candlestick charts are a powerful tool that can be used to analyze financial markets. They are easy to read and interpret, and they can provide valuable insights into market trends. However, it is important to remember that no chart is perfect, and candlestick charts are no exception. They have a number of limitations, and they should be used in conjunction with other technical analysis tools.
The next post will give you more ideas about candlestick charts and later we will discuss candlestick patterns which is the most relevant thing in technical analysis. So keep reading.
