Dear MATI Trader,
Line charts, bar charts or even point & figure charts.
There is one problem with choosing these charts to trade.
They don’t offer enough information and transparency of what goes on within the trading activity (buying and selling).
Solution? Candlestick charting.
The Candlestick chart is one of the earliest known form of charting. It was developed by the Japanese in the 1600s to analyse the movement of the rice futures market.
In 1989, Steve Nison then reintroduced Japanese Candlestick charts in his book, Japanese Candlestick Charting Technique. This popularised the candlestick charting method.
Today, Candlesticks are without a doubt the most popular chart type used by traders.
Each bar on the chart is called a candlestick or just a candle. Candlesticks displays the entire market activity (buying and selling prices) over a set period of time.
A candlestick displays the relationship between four prices namely:
Open (The first traded price for the time period)
Close (The final traded price for the time period)
High (The highest traded price for the time period)
Low (The lowest traded price for the time period)
With these four prices and with understanding the three parts that make up a candle, you’ll be able to read very easily whether the bulls or bears are dominating the market.
This information at a glance makes the chart a lot easier to read as a trader. You’ll use three main Candles when you trade.
1: The Up Candle
The up candle is also known as a bullish candle.
Let’s start with the three parts that make up a candlestick:
#1: The body
The body is the rectangular box that gives the candle its thickness. The body represents the difference between the open and close portion of the candle.
This will tell you that the bulls won (as the market traded higher at the close than at the open).
#2: The wick (upper shadow)
Just as an ordinary candle has a wick, so may you see a wick on a candlestick on a chart.
You get two types of wicks.
The upper wick of an up candle will show you the prices traded between the closing price and the high price of the candle. The lower wick of an up candle will show you the vertical line, with the prices that traded between the open price and the low price of the up candle.
Note: A candle with no wick is known as a ‘Shaved candlestick’.
#3: The colour
To know where the open and closing prices are on a candlestick chart, we use the colour of the candle. As we know the up candle is a bullish candle, the colour of the candlestick I chose is green.
Now that you understand the anatomy of an up candle the next two candles will be a cinch.
2: The Down Candle
The down candle (or bearish candle), is simply the opposite of an up candle.
It’s a candle where the bears won. This is where the sellers were able to bring down the price of the market from where the candlestick opened.
Here are the three components of a down candle.
#1: The body
The closing price is below the open price.
#2: The wick
The prices with the wick are between the open & the high price, and the closing price & the low price of the candlestick
#3: The colour
The colour of the candlestick, which I chose, is red which shows us it’s a down candle.
3: The Doji Candle
The Doji candle resembles a flat cross with two wicks, no body and no colour, where neither the buyers nor the sellers won.
Think of the Doji candles as the undecided candles between the buyers and sellers.
Whenever you see these Doji candles could signify major turning points for the next trend.
Until next time,
Trade well…
