Candlestick is a type of chart that usually available in all trading platforms. But it is also an extremely useful indicator as well.
There are many indicators in forex trading, but there are only a handful that is as commonly used as candlestick. Maybe you wonder, why candlestick? it is not an indicator, it is just a type of chart. Yes, that is true enough. Candlestick is a type of chart that usually available in all trading platforms. But it is also an extremely useful indicator as well.
Candlestick: Factual And Informative
This is the one type of chart that I think every traders ought to understand. Understanding candlestick will be extremely helpful for trader to understand price movement on the chart. Furthermore, even if a trader said that he is trading without chart (naked trading), he usually is still relying on candlestick. Candlestick offers similar information to that of bar charts, but with relatively more attractive display and infinitely more informative.
Candlestick is also the easiest chart to be interpreted, because each candle already supplies information about the strength of buy and sell, as well as its open and closed prices. So let's see the structure of the following candlestick.
Candlestick is established on data of high, low, and close prices. If in a certain time frame, close price is above open price, then transparent or white candlestick will be formed. While if close price is under open price, then black candlestick will be formed. The white or black part of a candlestick is being called as the body, and the vertical lines over or under it depicts high/low ranges and is called shadow.
Upper shadow represents the highest price at a time (high), and the lower shadow represents the lowest price at a atime (low). Consequently, from a single candlestick we can extract informations about the value of high-low-closed- prices, the strength of buy/sell, and transaction volumes in a certain time frame; hereinafter learning the disposition of the ongoing trend.
The black and white candles body could be either long or short. The longer the candlestick body, the stronger the buy/sell that has occured. See screenshot above; white-bodied candlestick shows that prices was closed at higher value than at opening, indicating an uptrend. And vice-versa.
Candlestick: Valuable Indicator
But that is not the only informations that can be gleaned from candlestick. There are many kinds of candlestick and candlestick patterns that indicate different propensity on chart movements. Here is some that every trader need to know.
If spinning top appear, then it means that at the time, there are not many buyers and sellers in the market. It signals the coming of reversal or the time when trend move to the opposite direction of its coming, at least for some time.
If Marubozu appear on the chart, it means buyers (on white candles) or sellers (on black candles) are very dominant, so the ongoing trend (uptrend on whites, downtrend on blacks) is particularly strong.
Doji is created due to the balance between buyers and sellers. The short body means that from opening to closing, prices remain unchanged. Consequently, the candle looks like a plus sign, or a cross, or inverted cross. Singularly, it is actually a neutral signal; therefore, upcoming movement is based on the previous candles and confirmation by future candles.
The candlestick that was founded in Japan during 17th century now is widely used in worldwide financial market due to its information-laden nature. There are many more variations of candlestick apart from those three. Based on the positioning, there are Harami, Hammer, Hanging Man, Star, etc. Through candlestick, we can predict the tendencies of upcoming price movement simply by studying the chart and notice the trends related to the emerging candles.