Candlesticks provide unique visual cues that make reading price action easier. Trading with Japanese Candle Charts allow speculators to better comprehend market sentiment and offer a greater depth of information than traditional bar charts - where the high and low are emphasized. Candlesticks give emphasis to the relationship between close price and open price.
Traders who use candlesticks may more quickly identify different types of price action that tend to predict reversals or continuations in trends - one of the most difficult aspects of trading. Furthermore, combined with other technical analysis tools, candlestick pattern analysis can be a very useful way to select entry and exit points The body of a candlestick illustrates the difference between the open and closing price. Its color (in this case, red for down and blue for up) shows whether the day's (or week's or year's) market closed up or down. The wicks show the high and low for the day.
Because the body of the candle is thicker than the shadow, candlestick charts visually stress how the close price relates to the open price far more than bar charts. Candlestick traders have a saying; the real body is the essence of price movement.
Because candlesticks give insight into what the market is thinking, one of the most useful aspects of candlestick analysis is its ability to suggest changes in the sentiment of the market. We call these candle formations Reversal Patterns. Note how the blue (close up) is different from the red (close down). If the volume also increases as we go from blue to red, we see that the bears have taken over from the bulls. Normally, its prudent to wait for at least two or three days to confirm the change in the trend (sentiment).
Candlesticks are superior to traditional bar charts in virtually every conceivable way. Candles will spot reversals before bar charts do. The very nature of the Candles is that it will warn you of impending reversals before the reversal has even taken place. While the candlestick line uses the same data as a bar chart, the colour of the candlestick’s real body and the length of the shadows convey an instant x-ray into whose winning the battle between the bulls and the bears. For instance, when the body of the candle is black, that means the stock closed above its opening price. This gives you an instant picture of a positive or negative close. Those of us who stare at charts for hours at a time find, candlesticks are not only easy on the eyes, they convey strong visual signals sometimes missed on bar charts.
On the next page, we will compare a traditional bar chart with that of a candle-stick chart. The reader will immediately see the usefulness of the candlestick in respect to the traditional bar chart.
The chart above is a bar chart. On this chart the stock looks strong since it is making consecutively higher closes. It looks like a stock to buy.
Using the same data as on the bar chart, we now make a candle chart below..
Note the different perspective we get with the candle chart than with the bar chart. On the candle chart, in the same circled area, there are a series of small real bodies—which the Japanese call “Spinning Tops". Small real bodies hint that the prior trend (i.e. the rally) could be losing its breath. As such, while the bar chart makes it look attractive to buy, the candle chart shows there is indeed a reason for caution about going long – the small real bodies illustrate the bulls are losing force. Thus, by using the candle chart, a trader would likely not buy in the circled area and thus help avoid a losing trade. This is but one example of how candles shines at helping you preserve capital.
The ancient tool (over 400 years old) of Japanese Candlesticks is a very powerfull tool. But it is only a tool. Effective candle charting techniques requires not only an understanding of the candle patterns, but also a policy of using sound, coherent trading strategies and tactics. These include using stops, determining the risk and reward aspect of a potential trade, observing where a candle pattern is in relation to the overall trend, and monitoring the market's action after a trade is placed. By understanding, and using, these trading principles, you will be in a position to most fully enhance the power of the candles.
Disclaimer: All information on this site is provided for informational purposes only! By no means is any
information presented herein intended to substitute for the advice provided to you by any health care or other professional
or organization.
