In trading, there are various charts, and the candlestick is the most widely used. So, how to read candlestick signals?
As the name suggests, candlesticks are known for their shape, similar to candlesticks. This chart type is commonly used to analyze stock, forex, and crypto movements.
This simple and accurate way of reading candlesticks will help traders. Here is the full review.
What Are Candlesticks?
Candlestick patterns are one way to see the possible price in a trade. This chart type is an ancient Japanese charting method to improve the accuracy of calculations reflecting the impact of investor sentiment on prices.
This analysis is also commonly used to determine the right time to enter and exit a trade. This method also becomes mandatory for investors or traders to understand because it is one of the smart strategies in the world of investment.
However, it should be noted that analysis with this pattern belongs to the directional category because the study relies on the trader’s subjective intuition to understand various patterns. This method can generate consistent money if it is balanced with the experience and flying hours of the trader.
The existence of candlestick charts that have survived to this day cannot be separated from the figure of Munehisa Honma, a Japanese man from the 18th century. Historically, this rice commodity trader recorded the movement of rice prices on rice parchment daily.
Over time, Honma also found a repeating pattern of the price blocks he had drawn earlier. In addition, Honma also often writes about trading laws.
The method developed by Honma then evolved into the candlestick chart known today. It should also be noted that the popularity of candlesticks today in the western world is due to the role of Steve Nison, who discovered this method in 1987 when he met a Japanese broker.
From there, he also wrote a book entitled Japanese Candlestick Charting Techniques (1991), which was then widely known throughout the world to this day.
Advantages of Using Candlesticks in Trading
What are the advantages of using candlesticks compared to other charts in trading? Here are some of them:
- This visual chart looks impressive, so it is comfortable to look at. This then makes many traders or investors more comfortable in analyzing their movements.
- This type of analysis shows fluctuations in stock prices and signals about future price changes.
- How to read candlesticks is also relatively easy. In fact, without having to study dozens of patterns, anyone can understand these patterns as long as they know the elements.
- This chart is also able to display market psychology. In a sense, traders can identify which party dominates, buyers or sellers. It can be observed through the size of the body and shadow.
Disadvantages of Using Candlesticks in Trading
Although it has many advantages, this candlestick chart is indeed inseparable from shortcomings, including:
- The graph of this chart doesn’t work well on too small timeframes. This makes scalping executions resulting from the use of this chart tend to have low accuracy. The candlestick is ideally used on the H1, H4, D1, or higher timeframe.
- Second, traders’ assessment of these candlestick patterns can be very subjective, for example, regarding what certain candlestick formations mean.
- Easy and Accurate Way to Read Candlestick Signals
- What’s a more accessible and accurate way to read charts? You can analyze the four elements below.
Easy and Accurate Way to Read Candlestick Signals
What’s a more accessible and accurate way to read charts? You can analyze the four elements below.
Candlestick tail or wick length is related to volatility or price changes. The long wick indicates the price is moving fast for the duration of the candlestick but gets rejected due to resistance.
Through the body size of this chart, you can get a question about the strength of each party. If the body is elongated, it means that the momentum is strengthening. If the opposite happens, the rate gets slower.
When you find a candle with a long wick with a body position at one end, it indicates resistance. On the other hand, the part of the candlestick in the middle of the lower wick and the upper wick means market uncertainty.
The ratio of Body Length and Axis
Finally, you can pay attention to the body and axis sizes ratio. When the market is trending with high momentum, you will often find long candlesticks with smaller wicks.
When market conditions are uncertain, volatility will increase. In this phase, the candlestick body will be more petite, but the wick will be even longer.