Candlestick Charts  in Stock Trading

Candlestick Trading Basics

Candlestick charts provide the exact same data as ordinary bar charts. the only basic difference is that the candle is provided with a body in the area between the opening price and the closing price.

When the closing price is greater (higher) than the opening price, the resulting candle is called a white or a hollow candle and sometimes an empty candle.

When the closing price is lower (less) then the opening price, the resulting candle is called a black or a solid candle.

When the the opening and closing prices are the same, the resulting candle is called a Doji. When a candlestick has no shadow at the upper end, as is the case with the second candle in the box, it is said to have a shaven top. When a candle has no shadow at the lower end, it is said to have a shaven bottom.

Understanding Japanese Candlesticks Trading

It has long been that markets are driven by emotion, namely greed and fear. Greed creates

Buying pressure, which drive prices upward, while fear creates selling pressure, which causes prices to drop.

Candlesticks reflects exactly what is happening in the markets concerning the relationship between buying and selling pressures.

When buying pressure is greater than selling pressure, prices rise and the resulting candles are white. As soon as this simple concept has been grasped, candlestick charts become very easy to read and to understand.

The sizes of candlesticks also play a very important role in conveying the extent to which one market pressure is more dominant than the opposing pressure. e.g. a very long white candlestick would be a clear signal that buying pressure was very strong during the period upon which the candle is based, whereas a small white body would imply that buying pressure, although dominant, was not all that strong.

In the same breath, if a black candle appeared during an uptrend, it should be viewed as an early alarm, requiring closer attention, because this can only happen when selling pressure overwhelms the buying pressure.

The logic of candlesticks lies in the fact that they must always be scrutinized from the point of buying pressure versus selling pressure.

The Shadows of Candlesticks

The shadows in Candlesticks are as important as the bodies of the candles and sometimes their importance are even higher than the bodies.

Here are some simple guidelines in order to understand these shadows:

• Length of Shadows indicate uncertainty.

• The greater the length of the shadow, the greater the degree of uncertainty and the greater the degree of failure.

• During an uptrend, the upper shadow should be regarded as the degree of failure by the bulls to dominate the market during the period upon which the candle is based.

• During a downtrend, the lower shadow should be regarded as the degree of failure by the bears to dominate the market during the period upon which the candle is based.

• During an uptrend, the lower shadow should be regarded as the degree of emerging bearishness, i.e. selling pressure dominated during the time it took for the lower shadow to form, even though the price went up and culminated in a white candle.

• During a downtrend, the upper shadow should be regarded as the degree of emerging bullishness because buying pressure dominated during the time it took for the upper shadow to form.

Fact: Japanese Candlesticks will greatly complement your analysis if used in conjunction with Fibonacci retracement levels.

Great Resources:

• Candlestick Shop 
• Candlecharts.com 
• Litwick.com