Technical Analysis : Introduction to Candlesticks

Having perceived that the Open (O), high (H), low (L), and close (C) is the ideal approach to outline the trading activity, we require a diagramming strategy that shows this data in the most understandable way. If a good charting technique is not used charts can get quite complicated to understand. The standard charts such as a column, area, pie chart do not work in the technical analysis of stocks. It is primarily because they can only show one data at a time whereas we need four data points to be displayed simultaneously for technical analysis. You can solve this problem by the use of Japanese Candlesticks. Hence it is most preferred for technical analysis of stocks by the traders.

Structure of Japanese Candlestick

In a candlestick chart, candles can be classified as a bullish or bearish candle represented by green and red candles respectively. On this website, we have opted for the green and red combination to represent bullish and bearish candles respectively. The structure of a candlestick is simple and can be understood well as you move ahead.

First, we shall look at a bullish candle.

The candlestick has three components:

• The Central real body – The body, rectangular in shape connects the opening and closing price
• Upper shadow – Joins the high point to the close
• Lower Shadow – Joins the low point to the open

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Similarly look at a bearish candle.

The candlestick has three components:

• The Central real body – The body, rectangular in shape connects the opening and closing price
• Upper shadow – Joins the high point to the close
• Lower Shadow – Joins the low point to the open

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Note:  When close > open Bullish candle. When close < open Bearish candle

Candlesticks are easy to understand, they enhance other techniques of analysis, they provide a leading indication of market turns and also give unique market insights.

Now that you know how to read a candlestick, In the next post, you will understand how candlesticks are used to identify patterns in candlesticks. These patterns will directly help you to set up a profitable trade.