CANDLESTICK charting has stood the test of time, with Japanese rice merchant Munehisa Homma (1724-1803) credited as its founder. Candlesticks are an elegant means of displaying complex information – and we will be discussing everything they can offer at our conference on 24 May. The candle or “real body” marks a price’s opening and closing positions for a given time period, while the thin wick or “shadow” marks the highest and lowest prices reached in that time. If the price closed lower than it opened, the candle is red; it is green if it closed higher.
David Jones of IG Index – a speaker at our charting session – says candlesticks let traders see very quickly who won the battle on the day, the bulls or the bears, based on the colour. “They are a more useful approach than looking at the traditional high/low, open/close format of bar charts,” says Jones, “which were the default option for many years.” Short-term traders “need more information when it comes to deciding on which way to trade and where to place stop losses.”
The size of the real body – the area between the open and the close of the candle – gives a clue to market sentiment. This is the area where most of the trading activity has occurred and is therefore sometimes known as the true value area. Because of the distinction between an uptrend (green) and downtrend (red), the colour of the real body can quickly underline the directional changes in any market over a given time frame. The smaller the real body the weaker the candle – typically this is when the market consolidates and uncertainty exists – with traders squaring positions and looking for a potential reversal or corrections.
IN THE SHADOWS
Big shadows can tell traders a lot about the extent of intra-period moves and whether sentiment changed markedly during the period. Long shadows at the bottom of the candle show that during the day the bears pushed prices lower, but the bulls retook control and pushed the candle back higher to close, (or even above the opening price). This can often be a very bullish sign if at a bottom of a slide, signalling a bullish reversal. Candles with long lower tails are known as bullish hammers. On the opposite side, it can be bearish if at the top of a rally the prices push higher, then are pushed lower leaving a long upper shadow, hence the bearish hammer name given to this kind of formation.
EGGS AND BASKETS
But candlestick charts can get too busy with moving averages and trendlines added, drawing focus from underlying trends, which may be more visible on a standard line chart. Traders will often still need to look at an intra-period chart to see if the low or high was at the start or end of the period.
Experts advise that candlesticks should be used with other charting techniques. But there is no need to feel overwhelmed. Angus Campbell, head of market analysis at Capital Spreads – and another speaker at our event – says “the most important thing to appreciate about charts is that they don’t bite – any initial fear can be overcome with just a couple of hours of practice”.
It’s worth persevering. Homma, the acknowledged founder of candlestick charting, is regarded as one of the most successful traders ever, raking in pounds by the billion. Both a lucrative and enlightening discovery.
To meet our charting panellists and dozens more trading gurus on 24 May, buy your £80 ticket today: www.cityamactivetrader.com