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What are Candlestick Charts and how they help in Technical Analysis

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Posted by : NIFM
13 August, 2013, 7:25 PM
Introduction to Candlesticks History: In 17th century Japanese began using technical analysis to trade in the commodity of rice. This version of analysis was different from the US version initiated by Charles Dow around 1900, many of the guiding principles were very similar: • The "what" (price action) is more important than the "why" (news, earnings, and so on). • All known information is reflected in the price. • Buyers and sellers move markets based on expectations and emotions (fear and greed). • Markets fluctuate. • The actual price may not reflect the underlying value. • According to Steve Nison, candlestick charting first appeared sometime after 1850. Much of the credit for candlestick development and charting goes to a legendary rice trader named Homma from the town of Sakata. It is likely that his original ideas were modified and refined over many years of trading eventually resulting in the system of candlestick charting that we use today. Formation of Candlestick chart: • In order to create a candlestick chart, you must have a data set that contains open, high, low and close values for each time period you want to display. The hollow or filled portion of the candlestick is called "the body" (also referred to as "the real body"). The long thin lines above and below the body represent the high/low range and are called "shadows" (also referred to as "wicks" and "tails"). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body representing the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price. • In comparison to bar charts, analyst and traders observed that candlestick charts are more visually appealing, easier to interpret and more acurate. Each candle in candlestick chart provides an easy-to-decipher picture of price action. Immediately a analyst can see and compare the relationship between the open and close with the high and low of a security or commodity. The relationship between the open and close is considered vital information and forms the essence of candlesticks. Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure.

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