A candlestick chart is a graphical representation of price action over time. It is often used by traders to identify potential buying and selling opportunities. In this post, we will explore What is a Candlestick Chart and how you can use them to make better trading decisions.
History of Candlesticks?
- Rice Trading has been established in Japan in 1654.
- Munehisa Homma was born in the early 1700s. He is a Rice Trader.
- Homma understands the basic Demand and Supply Concept but also identified the way to Predict the rice Future Price.
- Homma wanted to track the market emotions and this work become the basis of Candlestick Analysis.
- A Japanese Man named Munehisa Homma used Candlesticks to estimate rice Prices.
- Since then Candlesticks have gained popularity year by year because It’s an easy way to Analyze the Market.
What is a Candlestick Chart in Trading?
Candlesticks are a Japanese technique, He formed using the Open, High, Low, and Close the Price of chosen time Frame.
If the Market Price close is above the Open Price, We can say that market is Bullish. Bullish Candlesticks are mostly displayed as green Candles, But the color doesn’t matter You can use whatever Color.
If the Market Price close is below the Open Price, We can say that market is Bearish. Bearish Candlesticks are mostly displayed us Red Candle, But the color doesn’t matter You can use whatever Color.
In Candlestick Chart have a data set that contains:
- Opening Price
- Closing Price
- Highest Price
- Lowest Price
- Chosen time frame
- Wick or Tail
Opening Price:- Opening price is the price at which the market opens.
Closing Price:- Closing price is the price at which the market closes.
Highest Price:- Highest price is the price that reached the highest price in a given period of time.
Lowest Price:- Highest price is the price that reached the lowest price in a given period of time.
Time frame:- Time Frame can we monthly, weekly, daily, 4 – hour, 1 – hour, 15 minute, or any period you Prefer.
Wick:- The long thin below and above the body represent the low/high and are called Shadow We are also referred to as Wick or Tail. In the Candlestick Chart, the high is marked by the top of the upper wick that is, and the low by the bottom of the lower wick.
Body:- Body is a filled part of the Candle. It can be green or red based on the trader’s Emotions.
There are multiple charts representing Price Action including Bar Chart and Line Chart but, I Personally prefer Candlestick Chart because each candlestick provides an easy picture of Price Action.
So that A Trader can easily compare the relationship between the Opening Price, Closing Price as well as the high and low of the Market. This Relation provides the complete information of Stock for a Trader.
Basic Understanding Of Candlestick Charts
* Candlestick charts are one of the most efficient ways of analyzing changes in the prices of any security.
* The reason for the popularity of candlestick charts is that they are more attractive than bar and line charts.
* Candlestick charts tell us that there was more sales pressure or purchase pressure in a particular period.
* Each candle represents a particular period.
* Each candlestick has two parts real body and wicks, also known as shadows or tails.
Why Candlesticks are Important?
* Candlesticks are very important to Your Trading analysis because It’s a visual representation of What is going on in the Market.
* In Candlesticks You can easily identify Where Open, High, Low, and Close of Price, Which will give us an idea about the Price Movement.
* Candlesticks provide more valuable information than bar Charts.
* Most Professional Traders, banks, and Hedge Funds use candlesticks to analyze the Market.
Psychology behind Candlestick
In the Stock Market, There are three categories of Traders and Investors; The Buyers, the Sellers, and Undecided Traders.
The market moves on the basis of human emotions. Every Trader wants to make money but unfortunately, very few Traders are Profitable in the Market.
So let’s learn the Psychology behind Candlestick Chart.
The Buyers are looking for trades and want to spend little as possible to enter a Trade. It’s Human nature. If A Person shopping for a product wants to spend as little of their Money as Possible. Similarly, In the Stock Market, Buyers want to buy stocks at the cheapest price possible.
The Buyers are buying because they expect that prices will go up. If Buyers pushed the market, I like to phrase it as “Buyers are in Control”. The Meaning is that buyers are willing to pay higher and higher prices for a Particular Stock.
The Sellers are wanting to sell their shares as high as possible. Suppose You are a Shopkeeper so You always wanted to sell your Product to the customer as much as possible at a higher Price.
The Sellers are selling because they expect that prices will go down. If Sellers pushed the market down as like to phrase it “Sellers are in Control”. The Meaning is that Sellers are willing to accept lower and lower prices to sell our Stocks.
The Undecided Traders are pushing the Stock Price higher or lower. Because these Traders are not able to decide in which direction the market will go. So that is why the market moves in a Sideways Trend.
The undecided Traders accelerate price increases by creating a feeling of urgency among the Buyers. Who then buy quickly and cause prices to go higher.
On Other Hand, The Undecided Traders make prices decrease faster by creating a sense of urgency among the Sellers. They rush to sell and push the prices down.
Types of Candle
To Trade in the Stock Market, There are three candles to know about the Candlestick Chart.
Bullish Candle:- Candles with large bodies toward the upper side, as you can see in the below picture. That is a Bullish candle. The Buyers are in control of the Price and they will keep pushing the high and higher price. These Candles not only tell you the Price, They tell you that Bulls are winning and Powerful.
Bearish Candle:- Candles with large bodies toward the below side as you can see in the below picture. They are Bearish candles. That means, The Sellers are in control of the Price and they will keep pushing the low and lower price. In This Scenario, buying a “Long” Position would not be a great Idea.
Indecision Candle:- In Indecision Scenario, Bulls try to push the price up but They did not manage to hold a high. Bears tried to push the price down, but they did not manage to hold a low.
In these candles, The powers of the buyers and sellers are almost equal. So that no one is in control of the Price.
Usually, trends in price can change immediately after indecision candles. So whenever you see indecision candles after a strong uptrend or downtrend be careful that may be trend changed.
Candlestick pattern is the logic behind the candles, Some candlestick Pattern makes only one candle and some candlestick Pattern make a combination of two or more Candles.
Most Traders love to identify complicated chart patterns and make Trading decisions based on these chart patterns. There are a lot of chart patterns in Candlestick like Spinning Top, Hammer, Morning Star, Evening Star, Doji, etc
- What is Doji Candlestick Pattern : A Complete Guide
- Engulfing Candlestick Pattern – A Complete Guide
Don’t worry We will discuss each of them in the next articles, So keep in touch with us and If You have any questions related to “What is a Candlestick Chart”. You can comment below this Post.