by Jim Woods | August 15, 2012 12:05 pm
As traders, we’re all looking for a way to “see” the market a little bit clearer. Well to that I say, “Why not light a candle?”
I’m referring here to candlestick charts. What are candlesticks? Well, they are a tool of technical analysis that you can use to help sort out the psychology influencing the price action of stocks, futures and Forex markets.
What do candlesticks offer that typical high-low bar charts do not? As far as the actual data displayed is concerned, nothing. Just like bar charts, candlestick charts display the open, high, low and close for a given security.
However, when it comes to visual recognition of data and the ability to see data relationships and investor sentiment over time, candlesticks are far superior to traditional bar charts.
Traditional bar charts have little meaning by themselves, whereas candlestick charts display the action that took place in the market that day in much greater detail. A look at the price action in an equity over time allows you to use pattern analysis to determine the probability of that equity’s future movement. After a small amount of practice and familiarization, candlestick chart pattern analysis can play an integral role in just about any investment methodology.
We all know that prices often are influenced by fear, greed and hope. Some form of technical analysis needs to be employed to understand these changing psychological factors. Candlesticks allow you to read the changes in the market’s determination of value, which otherwise is known as investor sentiment. Candlesticks do this by showing the interaction between buyers and sellers, which often is reflected in price movement. As such, candlestick charts provide an insight into the financial markets that does not exist with traditional bar charts.
Candlesticks visually provide a clear and easy-to-identify set of patterns that are highly accurate in predicting market trends. By using candlesticks, along with some basic technical analysis, you can easily begin to see patterns emerge in the market — and more importantly, you can start taking advantage of these patterns when you trade.
The good thing about candlesticks is they don’t take months or years to master. With practice, the patterns can be memorized relatively quickly, and though this does take some effort, the profit potential understanding these tools brings is invaluable.
That’s right — for 250 years, candlestick charts have helped traders understand the price action in markets. The first use of candlesticks generally is attributed to a Japanese rice trader in the 1700s named Homma Munehisa (this is why candlesticks also are known as Japanese candlesticks). Homma began trading in the rice market in 1750, in the city of Sakata. This also is the reason you might hear references to “Sakata’s Methods” or “Sakata’s Rules” when studying candlesticks.
Homma analyzed decades of rice prices, comparing them with yearly weather conditions, and over time became a legend in the rice trading industry. It is from his methods of trading in the rice markets that candlesticks evolved, and thanks to Homma, we all get to benefit from this exceptional analytical tool.
This article first appeared on Traders Reserve. For more information, visit tradersreserve.com.
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