What are the candlestick charts?
candlestick charts, also known as Japanese candlestick charts are a popular form of financial charts used by a majority of the traders dealing in the Forex industry. They are used primarily to determine the price movements of a currency, commodity, derivative or security in the market at that point in time. Here, each candlestick represents one day, with one month having an average of about 20 candlesticks as per the number of the working days in the month. These charts are a combination of line and bar charts where each bar represents the four important parameters for that day i.e. the open, the close, the high and the low. These charts can also be used to represent the trading patterns on a short-term basis. Viewing the importance and features of these charts, it is highly important to understand the technicalities of these. Hence this article focuses further on how to read candlestick charts and decode the trend or results that they try to depict.
A brief history
This concept of candlestick charts was developed by the Japanese traders back in the 17th century to have the best trading of rice. In the early 1900s, the Americans too developed another technical analysis tool, which was very much alike to the former concept. With time the concept got various innovations and finally got the current shape that has been used for a long time in the Forex market. Some of the basic facts that can be depicted from a candlestick chart are as follows: –
- What is more significant in the market rather than why
- All kinds of information are presented properly for the price mentioned in the candlestick chart.
- The market is actually moved by some emotions rather than strategic steps.
- The markets are highly fluctuating and hence the real price might not be reflecting the underlying value as depicted in the chart.
The depiction and pros of candlestick charts in currency trading
Along with presenting the price action over a given period of time, candlestick charts also depict some market sentiment values like the greed of profit or fear of loss and showing the current trends in the market by analyzing the price chart of that month. To check the price shifts in the market during Forex trading one can choose the charts to know the trend. But the candlestick chart stands out to be the best due to the following depictions and reasons: –
- Although the line chart is very simple and uses the connection of the dots to show the actual motion of the price trend, the candlestick chart is better because here each of those dots can be represented as candlesticks and hence a deeper and more comprehensive analysis can be presented.
- The candlesticks provide more information on each instant and hence would be more helpful in taking some critical trading decisions, where a detailed analysis of the condition is a must.
- The formation of the candlestick can be done in any time frame and the results can be interpreted in forms of that frame only.
- When coming to the chart comparison, candlestick charts would turn out to be the easier ones to compare due to the direct data presented by them even for the minute intervals, that are generalized in other graph forms like bar or line.
- Since candlestick charts are hybrids of line and bar charts, hence they must be possessing better traits than both of these individually.
The general structure of a candlestick chart
The candlestick charts have the following general structure commonly found: –
- The rectangular figure is known as the body and is the widest part of the candlestick. This part represents the open and close of the specific period. For example, if the chart is of 30 minutes’ type, then it will show the opening price for that 30-minute period as well as the closing price for that 30-minute period.
- The wicks at the bottom and top of the candlestick represent the lowest and highest prices reached during that period of time. In some common terms, the candlestick chart that shows the open, high, close and low price for a given period is known as OHLC Forex chart.
- The stick also has different color shades present over it that represent any bullish or bearish in the market condition i.e. any rise or fall respectively. There is no fixed standard color combination and it is completely up to the trader to decide the color combination that is convenient for
The technical analysis for the charts can then be done based on the color patterns used. For example, if it is more bullish heavy, then the opening price is mostly at the bottom and the closing price is always nearly at the top. In case of bearish heavy, it is just opposite to that of the previous case.
The concept of candlestick charts sounds very exciting from the top, but it also has some hidden drawbacks in the same. Those are as follows: –
- There is no consistency in the chart and it looks different in different time frames. This is evident from the fact that it is created on the basis of one fixed time frame only. This makes the process cumbersome when one needs to compare the trends on different time frames and hence at that point one has to go for different sticks.
- The risk management with such sticks is highly unpredictable and difficult since they operate on fixed opens and closes and one cannot completely assure of these absolute values in a practical
- They are a lagging indicator because a trader has to wait for the finishing of the entire stick before executing any trade process, thus making the entire process delayed.
Hence, in a nutshell, it can be said that though these charts have their share of disadvantages, but still, they are helpful in being more comprehensive than other chart forms and depict the most approximate market conditions in terms of bullishness and bearishness.