Type of Charts for Technical Analysis-Part-2 by CA RAKESH SINGHAL
Type of Charts for Technical Analysis-Part-2
The charts
What is a chart?
Charts are used by the technical analysts or investors as a working tool. They use charts to plot the price movements of a stock over specific time frames. It’s a graphical method of showing where stock prices have been in the past.
We have already explained about the charts and there are various type of Charts, we have already explained two type of charts Line charts and Bar Charts. So now in this series we are describing now the very Famous Candlestick Charts.
3. Candlesticks
Formation
Candlestick charts provide visual insight to current market psychology. A candlestick displays the open, high, low, and closing prices in a format similar to a modern-day bar-chart, but in a manner that extenuates the relationship between the opening and closing prices. Candlesticks don’t involve any calculations. Each candlestick represents one period (e.g., day) of data. The figure given below displays the elements of a candle.
A candlestick chart can be created using the data of high, low, open and closing prices for each time period that 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 or White Candlestick or Green 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 or Black Candlestick or Red Candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.
Each candlestick provides an easy-to-decipher picture of price action. Immediately a trader can see and compare the relationship between the open and close as well as the high and low. 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. Thus, compared to traditional bar charts, many traders consider candlestick charts more visually appealing and easier to interpret.
NIFTY (Daily) Candlestick Chart
Daily Candlestick chart of Nifty. The Colour of the Candlestick is determined the relationship between the open and the close. Green Candles are Positive and Red Candles are Negative.
Why Japanese candlestick charts?
Japanese candlestick patterns originated from a Japanese rice trader called,
Munehisa Homma during the 1700s. Almost 300 years later, It was introduced to the western world by Steve Nison, in his book called, Japanese Candlestick Charting Techniques.
Anyway, that’s the brief history behind Japanese candlestick patterns. What does candlestick charting offer that typical Western high-low bar charts do not? Instead of vertical line having horizontal ticks to identify open and close, candlesticks represent two dimensional bodies to depict open to close range and shadows to mark day’s high and low.
For several years, the Japanese traders have been using candlestick charts to track market activity. Eastern analysts have identified a number of patterns to determine the continuation and reversal of trend.
These patterns are the basis for Japanese candlestick chart analysis. This places candlesticks rightly as a part of technical analysis. Japanese candlesticks offer a quick picture into the psychology of short term or Long term trading, studying the effect, not the cause. Applying candlesticks means that for short-term or Long term, an investor can make confident decisions about buying, selling, or holding an investment.
Therefore if you combine candlestick analysis with other technical analysis tools, candlestick pattern analysis can be a very useful way to select entry and exit points.
