Candlesticks have been used for trading ever since the ancient Chinese trading days. In fact, trading on candlesticks has been around since the 2nd century BC in China. This method of technical analysis was used by the emperors in China as the way to interpret the movement of the sun. These emperors would rotate their palms on the charts to tell how the market was performing. From this, they determined the direction of the market and set the buying and selling prices.
Candlestick charting is a simple and basic method of charting. However, it is often an extremely difficult method to learn because of its highly complex nature. The reason is that the placement of each candle on the chart is very important and interpreting the meaning of each one requires a great deal of knowledge of Forex trading. Candlestick charts contain two types of wicks. The top wick represents the most recent price change in the market, while the bottom wick symbolizes the previous price. On a candlestick chart, every white candle indicates the opening price in the trading period, which starts from the high of the session and goes up to the lowest price at the end of that period.
Candlesticks can also be made utilizing bar charts. Unlike the previous charts, however, there are no colored bars on candlesticks. Instead, the scale between the highs and lows of the trading day on the bar charts is represented by a color. Green indicates that the high touched point was reached in the trading session, while red indicates that it was surpassed by the low. Learning how to read a candlestick chart requires traders to have an in-depth knowledge of technical analysis and price action.
On a number of the stock and forex trading charts, candle formations are often used to represent a time-frame or price pattern. The time-frame refers to the number of days since the last closing price. Most traders use the time-frame indicator to identify whether a pattern is developing. When looking at the bullish or bearish candlesticks, you have to pay close attention to the size of the open and the size of the high and the low.
Another type of candlesticks, you need to pay close attention to is the hammer pattern. On this type of chart, the open of the formation is lower than the high and the lower wick represents the first small break of the price action, followed by a reversal of the trend. For the hammer candlesticks, you can expect continuation of movement upward until the support line is broken. When this happens, the price action will most likely continue on the higher path, heading towards the next break of the pattern. Keep in mind that bullish and bearish candle patterns usually go together.
Another important point you should note when learning how to read a Candlestick Chart is the reversal pattern. It is common for a candle formation to reverse itself. This may happen as the open of the formation is bigger than the high and the lower wick is breaking lower than the previous high. This makes it easier for the formation to reverse itself. As the price reverses, the open of the pattern goes higher and the price begins to reverse.
Traders who are using candlestick charts learn how to interpret the open and the closing prices. Knowing the direction of a trend is essential for successful day trading. Candlestick charting has made the analysis of these points much easier for traders to use. Traders can now see the direction by interpreting the color and size of the candle. Traders who study candlesticks will also learn how to identify support and resistance levels as well.
The upper wick in a bullish candlestick pattern represents a continuation of the previous trend. The lower wick in this case indicates that the previous reversal has ended and the current trend is up. Support in a bullish candlestick pattern means the previous trend is slowly fading out. Resistance in the upper wick area indicates that the current uptrend is breaking through an area of support. This means that traders will need to wait for further confirmation that the uptrend has moved past the support before entering into the risky territory of buying.