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Candlestick chart
Candlestick chart
Cryptocurrency
07.09.2021
Updated 22.11.2021
14:23

Sometimes reading the charts may be a difficult task for novice traders or investors. Usually, the prevailing majority of people tend to trust their instincts and be guided by them when investing. There is no doubt that such a strategy may be used during a bull market, but it doesn’t mean that it is appropriate for long-term planning.

Trading and investing are a game that is based on probability and risk management. Thus, such skills of reading are required for almost all investments. In this article, we will talk about the ‘Japanese candlestick chart’: what it is, how to apply it, and read information from it.

So, what is a so-called candlestick chart?

‘Japanese candlestick’ is a financial chart that shows the asset price direction within a specific time frame. Its name indicates that it consists of charts that represent the same period of time. Note that the duration may vary from several seconds to several years.

The first reference to such a chart goes back to the 17th century. A rice trader named Homma is considered to be a developer of this chart tool because this is what became the basis for modern candlestick charts. Of course, since that time the chart has overcome several stages of development, especially under the leadership of Charles Dow known as the father of modern technical analysis.

The candlestick chart is used when analyzing different types of data but in most cases, it is required to simplify the perception of price fluctuations on financial markets. If these provided tools are used correctly, it becomes easy to evaluate the possibility of price change. Besides, using them, traders and investors form their opinion based on the market analysis.

How do candlesticks work? 

Each candlestick chart has got the following elements representing the changes of the assets’ price within a specific time frame:

– opening price — the first fixed price of the deal with an asset.

– maximum price — reflects the highest fixed price.

– minimum price — shows the lowest fixed price.

– closing price — the last fixed price.

Usually, this combination of descriptions is called OHLC (On-high-low-off diagram from English abbreviation). The identity between the opening, maximum, minimal, and closing price depends on the type of candlestick.

The body between the opening and closing as well as the range between the body and maximum/minimum is called a wick or shadow. The range of the candlestick is the distance between the highest and lowest price of the candlestick.

Candlestick chart and indications

Most traders believe that it’s easier to read the candlestick charts than histograms or linear charts, even if they provide similar information. Considering that candlesticks are readable at first glance, they may reflect the price fluctuation more accurately.

It often reflects resistance between the candlesticks, long and short positions within a set time frame. Consequently, the pressure in favor of purchase or sale depends on the length. When the candlestick has a short position, it points it is close to a maximum/minimal closing price within a set period of time.

Settings and colors may differ depending on the tool for building a chart. However, green body color usually indicates that the asset closing price is higher than the opening price. Red goes down on the timeframe – the candlestick’s closing price is lower than the opening one.

Some analysts prefer a black and white image. In this case, the chart doesn’t use green and red, and instead of them, the downward movement is introduced by a fully black candlestick, while the upward movement – by a hollow candlestick.

What information, according to the candlestick chart, you don’t need to tell? 

You can use candlestick charts to get a general understanding of the price changes, but they don’t provide all the information required for a comprehensive analysis. Thus, candlestick charts cannot reflect the events between the opening and closing price; they only show the range between two points (including the highest and the lowest prices).

Let’s have a look at the following example: a wick shows the highest and lowest prices within a period but doesn’t explain the order of these changes. Nevertheless, time frames on the majority of charts may be changed, which gives traders a chance to receive more detailed info about the price changes within a set time frame.

The candlestick chart may include a lot of market noise, especially at low time frames. It’s often difficult to interpret the candlesticks due to the fact they change quickly.

Heikin-Ashi candlestick

Earlier in the article, we reviewed charts in the form of Japanese candlesticks, but besides this category, there are many other ways to draw them. One of them is called the Heikin-Ashi method.

If we translate ‘Heikin-Ashi’ from Japanese word to word, it sounds like a ‘middle line’. These candlestick charts are based on a modified formula with the use of an average price indicator. The main attention is paid to the elimination of the price fluctuations, including filtering the market noise. Thus, Heikin-Ashi candlesticks may define market tendencies, pricing models, and potential areas of reversal.

Traders use both Heikin-Ashi candlesticks and candlestick charts to define market tendencies better and avoid false signals. Green Heikin-Ashi candlesticks without a lower wick point to a strong upward trend, while red candlesticks without a higher wick point to a strong downward trend.

Heikin-Ashi candlesticks may become a powerful tool of technical analysis, but, like any similar methods, they have some limitations. It may take more time on forming based on the average price with the use of such candlesticks. They don’t also reflect price gaps, including how to hide some price-related information.

Conclusion

Candlestick chart is one of the most indispensable tools for any trader or investor. It provides the necessary flexibility to analyze data within different time frames and visualize fluctuations of prices of other assets.
If you thoroughly study the charts and models combined with analytical thinking, including experience, you will finally be able to receive some advantages on the market. In any case, according to many traders and investors, to increase trust, it’s required to use other methods, such as fundamental analysis, as well.