When you start trading, it is essential to learn about all of the different aspects of the process. One way to do this is to know about candlesticks, a type of chart used in trading.

Candlesticks were first developed in Japan, and they are still popular today because they are an easy way to see a lot of information at once. The candlestick’s body shows the opening and closing prices for the period, while the lines above and below show how high and low the price went during that period.

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There are four main types of candlesticks;

Bullish, bearish, doji and spinning top. Bullish candles suggest that the stock is going up, bearish candles indicate that the stock is going down, and a doji candle shows overall indecision. Spinning tops are simply candles where the price moves up and down within a small range.

Candlesticks are a valuable tool to understand when trading, as they give a greater insight into price movements. Here is an introduction to candlesticks and how you can use them in your trading.

When it comes to looking at the financial markets, many tools are available for traders and investors alike. The challenge is often knowing where to start and which tools will most benefit your trading strategy. One such tool commonly used by beginners and experienced traders is candlestick charting.

Price analysis method

Candlesticks have been used as a price analysis method for centuries in countries all around the world. They are still one of the most popular methods of analyzing prices today. The use of candlesticks can be traced back to Japan in the 17th century, where rice traders used them.

Candlesticks are formed when the open, high, low and close prices for security are plotted together on a chart. The candle’s body is created by the difference between open and close prices, and the wick is made by the difference between the high and low prices. When a close price is higher than an open price, the candle will be coloured green and called a bullish candle. When a close price is lower than an open, it will be coloured red and called a bearish candle.

Candlestick body

The area between the opening and closing prices forms the main body of each candle, which can be either hollow or filled, depending on whether the close price was higher or lower than the opening price. This part of the candle is referred to as ‘the real body’.

Candlestick wick

The wick of each candle represents the highest and lowest points reached by that security during that session. These are referred to as ‘upper wicks’ when trading closes at a new low or ‘lower wicks’ when trading has closed at a new high.

Day-to-day tool

As well as being used for analysis, candlesticks are also an essential tool in day-to-day trading. They are used to identify potential reversals in market trends and determine when it may be best to buy or sell. These formations can occur at the end of any trend but are most potent when they appear during solid momentum in an uptrend or downtrend.

Candlestick formations

Hammer/shooting star

An important candlestick formation is a hammer or shooting star, which forms when a recovery follows a significant downward price. This can form due to either good news about a company’s situation or cancelled planned changes. The pattern resembles a hammer with a long handle and a small head. Once formed, it indicates that the downward trend could soon reverse and begin going upwards again, so traders will often look for confirmation from other indicators before buying.

Hanging man

A related formation is a hanging man, which appears when a downward trend follows a significant upward move. This pattern resembles a man without his head falling from the sky. The candle will form if traders start to panic and sell off their positions, so it can be used as an early warning sign that prices could be about to fall. Confirmation from other indicators should still be looked for, however.

In conclusion

Today candlestick formations are just one of the hundreds of tools traders can use to help them with investment decisions and asset allocation strategies. They provide valuable insight into market sentiment and momentum levels and increase the probability of successful trades and investments. Candlesticks should be a crucial part of any trading arsenal for those looking for an edge in the markets.