What is Candlestick Charting?

The business world is filled with charts. All organizations, large and small, use charts to track various types of information and this is done so on many different chart types. You have probably heard of pie charts, line charts, bar charts, and scatter charts since these are the most commonly used types of charts. However, some forms of charting are not used as often and are not commonly known, such as a candlestick charting.

Where did Candlestick Charting Originate?

While it might be tempting to view candlestick charting as a newer charting method, candlestick technical analysis was originally developed by a Japanese trader in the futures market by the name of Homma in the 1700’s. He understood that there was a link between price and the supply and demand of rice, as was common knowledge, but he also understood the impact trader emotions had on the market. Homma realized that when emotions were factored in, the price and value of rice differentiated greatly. This difference also applies to stocks in today’s markets and the principles that were created by Homma centuries ago are the foundation of the modern candlestick chart that is used to stocks and the emotions that surround them.

What are the Components to Candlestick Charting?

Those that are familiar with traditional bar charts might be confused when trying to read a candlestick chart. However, the daily candlestick line demonstrates the high, low, open, and closed for a specific day on the market. What really makes reading a candlestick chart confusing is the “real body”, the wide part observed on the candlestick. The real body serves to represent the span between a stock’s opening and closing for a specific trading day. If the body is colored black or red, it means the stock closed at a lower amount than when it opened. A green or white real body indicates that the stock closed at a higher amount than at the open.

Another component to candlestick charting are the “shadows”. Shadows are the lines that are located below and above the real body. These serve to indicate that trading day’s low and high prices. If the upper shadow is short, it indicates that the open for that day was closer to the days high. The short upper shadow on an unfilled body or white body lets traders know that the close of the day was near the day’s high. This open, close, high, and low relationship provides the reader with a look of the day’s activities. Both real bodies and shadows can be long or short.

What are the Common Patterns in Candlestick Charting?

Real bodies and shadows combine to make patterns that represent the types of activities experienced during the trading day. Here are two examples of these patterns.

Doji Lines = Doji lines display when opening and closing prices were either close or exactly the same for a specific period. The length of the shadows can, and typically do vary.

Spinning Tops = Spinning tops are small real bodies, not as small as those found on Doji lines, that can vary in color. These are considered to be neutral indicators when trading ranges are very tight.

Overall, with candlestick charts being common in today’s stock market, traders must know how to read and interpret the information they are displaying. This style of charting helps traders visualize the emotions surrounding a specific stock and can, therefore, make a more accurate decision on how the stock might perform.

The Plusses and Minuses of Day Trading

Day trading is an investment technique where investors buy and sell quickly, usually over the course of a single trading day, rather than holding on to their investments for long periods of time. Day traders use methods that are dramatically different from those used by other investors, so the advantages and disadvantages of day trading are also unusual. It’s a technique that certainly deserves a place in the investor’s book of tricks, but it’s also important to understand the risks and rewards of day trading before taking the plunge and trying it out.

Fast Results

Speed is the single most defining feature of day trading, and it’s hard to say if it is a plus or a minus. Gains come quickly when a day trader is successful, and they can reinvest those gains very quickly. That gives day traders a way to expand their investments quickly, so they can make much larger profits than any other type of investor in a short period of time.

The reverse is also true. Day traders who make a loss can lose a fortune just as quickly as successful traders can win one. Many day traders use margin buying, which is investing with borrowed money. That makes the potential for sudden losses even bigger, although is also amplifies the profits. This factor means that a good day trader must be able to deal with risk and cope with sudden losses without giving up or panicking.

Independence

Day traders tend to be very independent people. Most of them are self-employed, so they don’t need to take orders from anyone else, and all of their profits and losses are their own responsibility.

This is a mixed blessing. On one hand, day trading is perfect for people who want to be their own boss and avoid working on a team. On the other hand, not having a team also means lacking a strong support structure. Day traders need to find investment capital on their own and handle all of their own research. If they take a loss, they don’t have support from a company that can cushion the blow to their own bank account. It’s possible for day traders to work together to help deal with those drawbacks, but that means giving up some of their independence.

Thrills and Addiction

Nobody can deny that day trading is an exciting profession. It offers an emotional roller coaster of rapid gains and sudden losses, with constant opportunities to assess new information and make meaningful choices. It combines all of the thrills of gambling with significantly more opportunities to tilt the odds in your own favor. It can be stressful, but success offers immediate gratification and a fulfilling sense of victory.

Like gambling, day trading can also be addictive. People who get used to that life of excitement can start to crave it, and that can lead to poor business decisions. Those poor decisions can cause losses and a downward spiral. Successful day traders are the ones who thrive on thrills but still learn enough self-control to set them aside and wait for the right moment to buy or sell. Striking that balance is difficult, but people who do it can find themselves with a very rewarding profession.

Clear Schedules

Like most professions, day trading offers a variety of mixed blessings. It also offers a clear benefit, in that day traders know the length of their workday and can stop thinking about their investments after it ends.

People who make long-term investments often find themselves worry about the state of their portfolio. Day traders don’t have any outstanding investments at the end of the day, so they can go sleep at night without worry about how things will change before the stock exchange opens the next day. While nobody can say that day trading is a stress-free profession, it does mean that their stress is confined to the workplace, which is an advantage that most other investors do not share.

Flexible Locations

There was a time when investors needed to be at the stock exchange to buy and sell, but that time has passed. Modern day traders can work anywhere that has a fast Internet connection. Plenty of them do it from home, but others prefer to do their work on the beach, in a park, or anywhere else that has a good wireless connection.

The Final Tally

Day trading is exciting, convenient, and has the potential to make money fast. It can also be addictive and mistakes tend to be expensive. Every investor needs to decide for themselves if the benefits outweigh the drawbacks. Traders that love their independence and love working under pressure will often find that they do, but conservative investors may want to look into other techniques.

Popular Candlestick Trading Patterns

Five Popular Candlestick Trading Patterns

Traders have been using technical analysis to guide their actions on the financial markets since the early 20th century, and candlestick charting has been one of their most popular tools. Candlestick charts have many advantages over other technical tools such as bar and line charts; first of all, they display all the information a trader needs to get a good sense of how stocks or other securities perform over various trading periods. Second, candlestick charts generate certain candlestick patterns that traders can easily interpret for the purpose of formulating profitable strategies.

The base data displayed by a candlestick chart over a time period consists of the following price information: open, close, high, and low. The relationship between these values and the way the stock performs during trading sessions are the factors that create patterns. Candlesticks can be used to monitor just about any security, but they are mostly favored by active stock traders.

The body of each candlestick displays the opening and closing prices while the shadow displays the high and low ranges. In general, when the body of candlestick is hollow, the stock closed with a gain; solid candlesticks indicate a loss for the trading session.

Candlestick Patterns

Traders can take advantage of dozens of candlestick patterns that offer insight on price direction and market momentum; however, not all patterns are constantly reliable. For stock trading, the most popular candlestick patterns are those that indicate a continuation of the price direction or a reversal.

To understand candlestick patterns, traders need to keep in mind that long white candlesticks emerging amidst heavy volume are indicative of a bullish sentiment; long black candlesticks are indicative of a bearish sentiment. These are the most basic candlestick patterns; however, they have to be combined with more advanced patterns because they do not offer strategy by themselves. Black and white candlesticks mostly indicate prevailing trends.

The five most popular candlesticks patterns are called Doji, Dragonfly, Evening Star, Hammer, and Harami. Their colorful names originate from 19th century rice traders in Japan who observed these patterns to get an edge in the commodities trading markets. Day traders must keep in mind that candlestick patterns should be supported with fundamental analysis as well as with hourly charts.

Doji

This is a neutral pattern that appears in the shape of a cross on the chart. Doji patterns emerge when the opening and closing price of a stock is almost the same. A Doji indicates that buyers and sellers are split on the opinion of whether they should take bullish or bearish positions on a particular stock. The key to using Doji patterns is to look at the preceding candlestick; if it is long and white, traders are probably thinking about selling. If the preceding candlestick is long and black, traders may be done selling the stock and are ready to start buying.

Dragonfly

This pattern indicates a potential reversal in price direction. A Dragonfly pattern looks like the letter T on the chart, and it presents a long shadow at the bottom with no shadow at the top. The long shadow is indicative of a bullish sentiment, but the Dragonfly also shows that sellers are putting pressure on the stock. Depending on the news and fundamental analysis, traders may use this pattern to take a position of reversal.

Evening Star

This pattern consists of three candlesticks: the first one is a long white, the second can be black or white but it is invariably short in terms of body and shadows. The third candlestick is long and black with a shadow at the top. Similar to the Dragonfly, the Evening Star indicates a reversal.

Hammer

On the chart, this pattern forms the shape suggested by its name. The opening and closing prices are virtually the same, but the shadows will show that traders shorted and sold the stock through the day before buyers show up towards the end of the trading session to boost the stock back up. The objective of following the Hammer pattern is to observe the moment when sellers have lowered the price of the stock to a level that makes it attractive to buy for a quick profit.

Harami

This pattern usually emerges after a couple of trading sessions, and it can be bullish or bearish. On the chart, the candlestick on the first day is pronounced; on the second day it shows a subdued and opposite trend. The Harami pattern is more of an observation of momentum than an indication of price direction. A bullish Harami will present a large candlestick created by sellers on the first day followed by a narrow range candlestick that shows buyers as they start regaining control of the stock.