Candlesticks in Trading? | Black and Brahman in Wokingham

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In this blog, we will not only take you through what candlesticks are in the world of trading, what they represent but also why this style of graph is the favoured choice for many traders.

What are Candlesticks?

Candlestick charts were original created in Japan prior to the bar or point-and-figure chart, now often used in trading as a visual aid that show shifts in trading price and movements as well as working out possible patterns. This style of chart is helpful as it highlights four price points - open, close, high and low, which can take place over the year, month, week or day. Traders often select a time period to monitor or review to gather findings to be fed into their own trading strategy and how this could impact when to trade certain assets.

What do Candlesticks Represent?

Similarly, to a bar chart, a candlestick chart shows the trading market's open, close, low and high for your desired time frame.

The wide section of a candlestick is representative of the difference between the opening price (this is the price that the financial instrument opened at for the time period it is set to) and the closing price (this is the price that the instrument is at when the markets close); this is the main part of the candlestick, which is often referred to as the 'real body'. Traders follow this because it allows them to see how far the price has changed over the given period, whether that is a day, month, or year. The end of the body that represents the opening price or the closing price is dependent on whether the day's trend was bullish or bearish (the lower end represents opening price if the trend was bullish).

The Wicks on a candlestick are representative of the highest and the lowest prices that were reached by the instrument in the chosen period. This is an important factor for analysts because each day's range can be realised using this information. The range is then used for further calculation to find the average volatility of the stock, which can facilitate predictions on how long a trade will take on future days. A method of finding the range for a certain time period, facilitating predictions on how long a trade will take.

Green candlesticks - This represent bullish periods (this is the term used for an upward trend in the market price)i.e., the price closed higher than when it opened during that specific timeframe.

Red candlesticks- Represent bearish periods (this is the term used for a downward trend in the market) i.e., the price closed lower than when it opened during that specified time period.

It's important to note that traders can use different colour keys to demonstrate the above. For example, a bullish period could also be represented by being filled in or black, whilst a result where the open price was higher, could be shaded in white or left empty.

Why Use Them? (As opposed to other indicators)

Candlesticks are a useful tool when in the world of trading as they provide you a detailed projection of the price movements that occurred within the desired selected timeframe. Comparatively, details such as the high, the low and the opening price are not shown on a line graph. Candlesticks offer a more complete visual picture of price action to be used to infer when you should enter and/or exit a trade, as they show how far the price has moved during a time period - not just the closing price. There have also been previous studies conducted to see just how effective candlestick charts really are. Whilst the reliability of candlestick patterns can vary a lot depending on the market you trade in and the timeframe you set, they can help build up a part of your individual trading strategy.

Reliability Factors to consider when using candlestick charts in your trading:

  • Timeframe: Shorter time periods can usually lead to less reliable results due to higher volatility experienced.
  • Trading Instruments: Trading instruments all work in different ways so whilst some candles are specifically useful for forex may not suit stocks. In summary, the higher the volume being dealt with, the more reliable the candlestick charts will be.
  • Chart and Candlestick Patterns: Think about the environment at which the candlesticks are happening such as if there are resistance or support lines nearby. Different candlestick patterns can also have different reliability but simply, the more candles within a formation/chart, the higher reliability level.

Support and resistance lines relate to trading levels that seem to act as barriers, hindering the price of an asset from going a certain direction. Support lines appear when a down trend/bullish period is expected to pause due to demand whilst a resistance occurs when an uptrend is predicted to halt because of a concentration of supply.

When candlestick trading charts are used correctly it can assist in your analysis of the market and give you helpful insist on forecasting future trends and patterns. They also make it a lot easier to read price movements by its colour coded keys.

Black & Brahman

In summary, candlestick charts provide traders with the direct of prices for certain assets for the chosen timeframe, demonstrated by the colour/fill of the candlestick.

If you wish to learn more about candlesticks and how we use them to decide when to enter or exit a position, do not hesitate to book onto our CPD accredited Trading Masterclass and get access to all the important and crucial steps to enable you to trade safely, reliably and profitably.

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ABOUT THE COMPANY

At Black & Brahman, we teach individuals how to trade; safely, reliably, and profitably.

Our comprehensive, CPD accredited courses, show you how to utilise simple, tried and tested strategies, to make your money work for you by trading stocks, cryptocurrencies, forex or commodities.

Confidence is key when trading! That’s why included in the price of the courses is your own personal mentor. On completion of the course, they will work with you whilst you initially trade with virtual money, until after you’ve started trading with live funds. You will also benefit from the knowledge they’ve gained over years of trading. For example, they will educate you on how to minimise your losses by showing you how to avoid exposing yourself to unnecessary risk, as well as teach you how to potentially take calculated risks to maximise your profit.

BLACK & BRAHMAN LTD ARE A TRADING DEVELOPMENT COMPANY. WE ARE NOT FINANCIAL ADVISERS.

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