Candlestick (Price Chart) - Explained
What is a Candlestick?
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Table of ContentsWhat is a Candlestick Price Chart?How does a Candlestick in Investing Work?Two-Day Candlestick Trading PatternsThree-Day Candlestick Trading PatternsAcademic Research on Candlestick
What is a Candlestick Price Chart?
A candlestick is a price chart that helps investors or traders identify price direction and movements for a particular period. This chart embodies data for different periods and each period is clearly demarcated by price bars. Included in a candlestick are the high, low, opening and closing prices of securities trading at a specific period.
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How does a Candlestick in Investing Work?
A candlestick has its origin in the Japanese market, it originated when the Japanese rice traders track the price movement of rice daily. The candlestick is now popularly used in many countries, including the United States. Here are some important things to know about candlesticks;
- A candlestick is a price chart that reflects the price movements of a security for a specific period.
- The opening, closing, high and low prices of securities are contained in a candlestick.
- Candlestick has its origin in the Japanese rice market before it was adopted by the United States.
- Typically, a candlestick reflects the price trends of a security for a trading day. Traders can use the candlesticks to determine price patterns in the market.
Candlestick chart was developed in Japan in the 1700s, it was used by the Japanese rice traders to track the price of rice everyday. Basically, a candlestick shows the price of a security for a trading day, the high, low, opening and closing prices are shown in the price chart. Hence, if a month has 15 trading days, there would be 15 candlesticks. Generally, investors and market analysts use the candlestick in making decisions as to when it is appropriate to enter or exit the market. There are different colors of candlestick, the white, green, black, red and few others. White and green candlesticks indicate a bullish trend in price movement while black and red candlesticks indicate a bearish pattern in price movement. Candlestick charting is used for asset trading, security trading and in the foreign exchange markets.
Two-Day Candlestick Trading Patterns
A two-day candlestick trading pattern can occur, it is a candlestick pattern mostly used in short-term trading. In this trading pattern, there is the presence of an engulfing pattern in which the first candlestick is small and submerged by the second candlestick. When the engulfing pattern occurs at a downtrend, it indicates a bullish pattern and when it occurs uptrend it is a bearish pattern.
Three-Day Candlestick Trading Patterns
In this trading pattern, there are three candlesticks, this can occur in a bearish reversal pattern called an evening star and a morning star which is a bullish reversal pattern. In an evening star for example, the first candlestick moves at an uptrend, the second candlestick outperforms it a little while the third candlestick closes below the middle of the first candlestick.