Candlestick Charts

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“Candlestick Charts are more than just a technical analysis tool” – Any experienced trader will tell you that!

Do you use them in your trades? If not, shall you?

Let’s try and understand the basics of candlestick charts and how do they work in day to day trading for different kinds of traders.

Candlestick Charts – Introduction

Candles give light in darkness and candlestick charts give light for investors’ across the world.  For more than three centuries even with the latest technological developments in this world, the use of these Japanese charts determines the right strategy for the various price movements of the financial instruments.

The Japanese use of emotions in various colours is technically used as varied tiny rectangular tiny boxes resembling candles.  

Also Read: Candlestick Patterns Basics

Each box or candlestick typically represents one day of trading activity of a particular trading instrument. Financial instruments are the backbone of any country and investing in them with the help of this chart could make anyone prosper by the profits from them.

Candlestick Patterns

Candlestick Charts – How do they work?

Candlestick charts are used as technical tools for analyzing the price movements for any changes in the near future either for an upward swing or for a nosedive downwards.  

Also, this strategy is employed by major financial institutions including the mutual funds in all countries. This is only a hypothetical technical analysis which determines the future behaviour or pattern of a financial instrument like stock, currency, and derivatives as per their previous price movements for any period of time.

The candlestick or the bar could be described in terms of shape, solid or hollow, real and shadow and also with colours which include:

Shape:

Each candlestick consists of a real body with the opening of the instrument at a specified time and its closing of it. There are two wicks or line protruding on the upper end and the lower end of the real body. The upper one represents the high price and the lower wick represents the low price of the specified period.

Here the period could be a minute to years. These two wick parts are called the shadows of the real body. The upper shadow and the lower shadow are towards the high and low of the period respectively.

Candlestick Patterns

Colour:

The colour of the candle depends on its previous close.  

If the colour is mainly white, blue or green it is trading higher than the previous close.  And if the colour of the candle is black or red in colour it means it is trading below the previous close. These colours at any point of time determine the trading pattern of the instrument for that particular time compared with its previous close.  

Candlestick Patterns

Body solid or hollow:

The candlestick body determines the direction of the price at a particular point in time.  If it is solid it represents a movement of price moving down from the open and a hollow means it is trading up from the open price.

Significance of Candlestick features:

Since the time period of the candlestick can be varied and the various indicators of shape, colour, shadow, real body, shadows all will help in determining the technical movement of the price of the financial instrument.  

Candlestick Charts – Examples

To understand candlestick charts better any instrument for a particular time period could be taken.  Let’s take an example of Nifty for a particular day trading. Nifty is the national stock exchange index the highest traded financial instrument in the country in terms of a number of trades and volume every day.  

The single line or the shadow above the real body will indicate the top price at which it was traded for that particular day. The horizontal line starting of the candle is the opening price of the nifty for that day.  

The lower horizontal line of the box is the closing of the nifty. The lower point of the line from the down the real body or box is the day’s low price of nifty on that particular day. The colours will change intraday. If it is white or blue it means it is trading above the yesterdays close.  

And if it is indicated in black or red it means it is trading below the yesterday’s close. If the body is shown as solid it means it is getting lower from its previous prices that the price is going down. If it is hollow it means the price is rising precisely at that point from the previous price.  

Candlestick charts – Benefits

The main advantage of the candlestick charts is to perform a technical analysis of the trends of the financial markets like stock, foreign exchange, commodity, derivative and options markets and also for any particular financial instrument.

Just by visualizing the charts rather than confusing mathematical formulations and calculations one can arrive at the trend of the desired financial instrument. There are more advantages which include:

It is not necessary to be a professional to understand candlestick charts and it is easy for any commoner to start investing or trading in any kind of financial markets with the help of these charts.

It uses the simple statistics of day to day trading which includes only the previous close, the current open rate, high and low of the day and its closing price of the day. The colours and the body strength are also easily interpretable for trending conclusions of the markets.

Since all emotions and information regarding the market or a financial instrument is only reflected in its price, the candles based on only the price movements for determining the trends, breakouts and many more are more authentic and accurate than any traditional or modern predictions.

A number of new techniques are built based on only the candles including the Fibonacci analysis, Heikin-Ashi candlesticks, and many more technology-based tools which are used for technical analysis of the markets.

The unique features of only the prices enable these candles of prices to be used for diversified or almost all financial markets.

These candles can be adopted by any kind of market activity which basically includes investing for the long term and short term, intraday trading, futures trading, Swing trading, hedge trading, and many more.

Candlestick Charts – Concerns

Even though the candlestick charts are time-tested for centuries they still have difficulties for different forms of trading in different times.  Some of them include:

Different trend-setting for different periods:

A five minute period of the chart will show one kind of trend and the 15-minute frame could be quite the opposite of it. This is a lot confusing for many newcomers and who are not experienced or professional enough for using these charts.  

The time frame is the key to form the candle. Only based on the time frame the candle can be built. This time frame defines its open, high, low and close for that period and also corresponding to its earlier close prior to that period of time.

What could be done for this different trend showing for different time limits?

Hence it could change. So an alternative could be to take candles for a specific volume of shares traded.  This could get a clear picture of the movement of the financial instrument for a substantial period of time and volume.

Hence the movement of the price above the normal average volume candle could be an ideal instrument for acquiring accurate trends of the financial instrument.

Managing risks are difficult with candles:

Since the candles are only based on the price movements of a particular period the entry and the stop loss could be determined only by the 4 levels of high, low, open and close.  This in many cases could be huge and if the stop loss triggers it could be a huge risk of capital.

Lagging indicators with candles:

Since most of the entries are taken only at the close of a candle it becomes a lagging indicator.  Most of the action will be over within the candle and any new movement either side should accompany volume.  Hence to lag behind and not to take the opportunity of the tide is another advantage of candles.


Candlestick Charts – Conclusion

Mostly the candlestick charts encompass the entry of the big players with their volume selling and buying of financial instruments to decide the trend. This could vary according to the time of the candle.  And this could be only predicted for that period which could be contentious in certain cases.

Hence even with candlestick charts to trade or invest in financial markets, it is necessary to have patience, and discipline supported with the money which does not need an immediate return for any emergency purpose but for long-term use is a must.  

Only with these and along with the centuries-old candlestick help to make anyone prosper and have a happy life.

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