Candlestick chart was first invented by the Japanese in the 18th century by Munehisa Homma who was basically a rice trader. Candlesticks are basically shows where the share price opened, and what was the high and low and where it is closed in a given timeframe. A bullish market in a stock can be identified based on the candlestick.
What are Candlestick Charts and How it Works
Candlesticks are nothing but a graphical representation of price movement in a particular stock. If the close of the candlesticks is lower than its open then the candlestick is colored red which indicates a decline in stock price. However, for any upside movement in stock’s price i.e. closing price is higher than the opening price for any timeframe, the candlesticks color will be green and represent a bullishness in stock.
Below are the graphical illustration of candlestick.
Apart from above normal candlestick, if the stock price goes up after the opening but is not able to sustain and comes back to the open then a shadow is formed on the upper side. And same scenario if happened in downside i.e after opening the price goes down and again unable to go down further and returned to opening price which generates another shadow in downside. The outcomes is now something like as shown in below picture and it is called a Doji Candlestick which shows neutral market sentiments.
Advantages of Japanese Candlestick
There are many advantages of candlestick charts, some of the important ones are given below.
- Candlestick charts are easier to understand than other charts.
- By looking at the candlestick charts, the trader can easily find out the direction of the market and the share.
- Only 4 items need to be seen in the candlestick chart, that is open price, high price, low price and close price.
- If a shadow is formed in the candlestick chart, it alerts the trader that the direction of the market may change.
- Candlestick charts are easy to read which enable traders to do technical analysis in live market also.
Frequently Asked Questions
What is the limitation of Candlestick charts?
Ans. Candlestick charts are derived from price action so to work efficiently with candlestick, one should have knowledge of price action also.
What should be the timeframe while using candlestick chart?
Ans. Like other charts candlestick charts can be used in all available timeframe on the particular platform. Timeframe basically a choice of the trader which suits him more.
Are Candlestick pattern are enough for trading?
Ans. No, candlestick charts helps a trader in assuming the market direction and its strength but you should have good commands on other tools as well and most important is price action.
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