The art of trading and investing have been around for centuries and have evolved drastically over the years. With the advent of modern technology, there are now various ways to view and analyze price movements, giving traders and investors more tools to improve their profitability. One powerful tool that is often utilized by traders is the candlestick chart.
Candlestick charts are a type of financial chart that graphically represent the price moves of an asset over a given timeframe. Although the origins of this type of charting are often credited to a Japanese rice trader named Homma, it was further developed by Charles Dow and is now seen as a form of modern technical analysis.
When it comes to understanding how a candlestick chart works, traders need to take note of the following price points: open, high, low and close. First, the open is the first recorded trading price of the asset within that particular timeframe. The high is the highest recorded trading price of the asset within that timeframe. The low is the lowest recorded trading price of the asset within that timeframe. Lastly, the close is the last recorded trading price of the asset within that timeframe. Together, these price points are considered the OHLC (open, high, low, close) values and are the foundations on which a candlestick chart is built.
Looking at a candlestick, one can interpret the following. The body of the candle represents the open and close price, while the wick or shadow indicates the highest and lowest prices in the measured timeframe. If a candle is painted green, it usually means that the close price is higher than the open, representing a bullish market move. On the other hand, if the candle is red, it means the close was lower than the open and is typically represented as a bearish move.
In addition to the traditional Japanese candlestick chart, traders can also employ Heikin-Ashi candlestick charts to further assist with their analysis. The Heikin-Ashi technique is a modified formula which uses average price data in order to filter out some of the market noise and better identify market trends and potential reversals.
Candlestick charts are an indispensable tool for traders, but they should not be the only form of analysis. It is important to consider other methods such as fundamental analysis in order to properly assess a market. Ultimately, with enough practice and study, traders may use candlestick charts to gain an edge over the market.
