(December 21, 2020)--In all financial markets, the price of any asset is shown in the form of charts that constantly change during a trading session depending on its supply and demand. Candlestick analysis is used to predict the future direction of price movement and make a profitable deal. How to work with it, and what data can you extract? Let’s figure out this together.
What Is a Candlestick? What Is It for?
A candlestick is a way to display information about the price movement of a particular asset. The candlestick chart is one of the most popular components of technical analysis. It allows traders to quickly and easily interpret price information displayed on multiple price bars.
A candle has three main parameters:
- The body of the candle - It represents the open-close range.
- A wick or shadow - It represents the daily high and low.
- A color indicator - It shows the direction of the market movement - a green (or white) body indicates an increase in price, while a red (or black) body indicates a decline in price.
Over time, individual candles form patterns that traders can use to identify major support and resistance levels. There are many candlestick patterns that indicate trading opportunities in the market. Some signal the balance between buying and selling pressures, while others define continuation or hesitation patterns in the market. Before you dive into Forex trading, it is important to understand the basics of candlestick patterns and have an idea of how they can influence your trading decisions. In order to understand this, let's start by looking at the different types of charts.
#1 - Line Chart
A line chart is a curved line that usually displays the closing price at a particular moment (timeframe).
#2 - Bar Chart
In a bar chart, a price movement is shown as vertical lines with small horizontal shelves to the left and right of the line. The bar shows four prices:
- Bar opening price;
- Minimum value;
- Maximum value;
- Bar closing price.
#3 - Japanese Candlestick Chart
The Japanese candlestick chart is displayed as a rectangle with two tails - one at the bottom and one at the top. Just like a bar chart, the Japanese candlestick chart reflects the four key prices:
- Candle opening price;
- Minimum value;
- Maximum value;
- The closing price of the candle.
Based on the data it provides, the Japanese candlestick chart is more informative compared to the line and bar charts. The color gamut settings are quite extensive, so the trader can always choose the colour combination at one’s discretion.
Features of Trading by Candlestick Analysis
For candlestick analysis, you only need a price chart. On top of that, you should be able to recognize the main candlestick patterns like bearish candlestick patterns and understand how the market can behave after their formation. The trade should be opened when the last candlestick in the pattern is closed to be 100% sure that the pattern has been formed.
Buy Candlestick Patterns
All the candlestick patterns signal that buyers are entering the market, and the trend can change its direction. Here are some of the most common buy candlestick patterns:
- Hammer candlestick pattern;
- Morning star.
Sell Candlestick Patterns
All of the following patterns are a signal to the trader that the upward momentum is weakening, so one needs to prepare for selling.
- Evening Star;
- Three Black Crows
What Way to Follow?
Before you start using candlestick patterns in Forex trading, we recommend opening a demo account on Forextime and practicing identifying candlestick patterns on it. You should only then switch to real trading. For practice, you can connect to the manager's account and watch how he uses candlestick analysis in his strategy. Such an approach will help you make the right trading decisions and conduct profitable deals with zero risks to your budget no matter if you are trading in South Africa or any other country. So, register an account on a trading platform, test it out for free, and play around with different patterns to have a clear idea of how each of them works, and how you can benefit from a particular deal at a particular moment in time.