Candlestick charting is great for traders wanting an extra edge in their quest for profits - this is due to the way the candle bodies are drawn, that gives a better insight that is visual, and shows trader psychology.
More traders than ever are using candlestick charts due to the extra trading edge they can get with this form of charting - if you have not used them before, then this article is for you.
Candlestick charts are not new, and have been used for hundreds of years by Japanese traders to predict and act on market movements.
Candlestick charting giving greater insight into human psychology
In the 1700's, Homma, a Japanese trader in rice, noticed how the price of rice was influenced by human psychology as much as the supply and demand situation. Homma used candlestick charts to trade rice and amassed a huge fortune in the markets. In fact, it was rumored he never to have had a single losing trade!
Human psychology has never changed, and has remained constant over time - candlestick charting is therefore just as useful today, as it was hundreds of years ago.
The Re-emergence of Candlestick Charting
Steve Nison, book, "Japanese charting techniques," bought candlestick charting back into the public domain in the 1990s. Currency traders soon started using candlestick charting instead of bar charts for greater insight into market movements.
So why use Candlestick Charts?
1. They complement other Technical Tools
You can use candlestick charts as you would use the common bar chart, and you can combine them with traditional market indicators. Candlestick charts are a great way to spot opportunities, and then filter, and time trades with other indicators.
2. Spotting trend changes
Because of the way candlestick charts are viewed, they can give warnings of market reversals, far more visually than traditional bar charts.
If you look at candlestick charting, the human psychology of the move literally jumps out the page at you.
3. Straightforward to use
Candlestick charts use, the same open, high, low and close data that traditional bar charts use, and are easy to draw.
In addition, there are many packages like supercharts and tradestation that will draw them automatically for traders.
The different candle names are also easy to remember.
4. Define market momentums
The way the candlestick chart is drawn not only gives the direction of price, but also the momentum behind the move.
The candlestick chart graphically illustrates the relationship behind the open, high, low, and close by the body - and adds an extra visual edge, due to the way they are drawn.
The candlestick has a wide part, called the "real body." This real body represents the range between the open and close of that day's trading.
When filled in black, the real body means the close was lower than the open.
If the real body is empty, it means the opposite - the close was higher than the open.
Above and below the real body we see the "shadows." We see these as the wicks of the candle (which give them their name), and the shadows actually show the high and the low of the day's trading.
If the upper shadow on the filled-in body is short, it indicates that the open that day was closer to the high of the day. On the other hand, a short upper shadow on a white, or unfilled body shows the close was near the high.
A Visual Aid to Give You an Edge
Candlestick charts should be used rather than traditional bar charts because they give you an extra visual dimension.
Regardless, of whether you are a day trader, position trader, system trader or a trader who likes to make your own trades, there is really nothing to dislike about candlestick charts!
Easy and fun to use, and providing a greater insight into market moves, along with the ability to use in any type of trading, means if you arenï¿½t already using candlestick charting, then its time to start.