HOW TO LEARN ABOUT CANDLESTICK & ITS USES ?

FUTURE:

"SELL HAVELLS BELOW 280 TGT 270.00 SL 285.00"

CASH:

"SELL SRF LTD BELOW 916 TGT 895.00 SL 930.00"

What is a Candlestick ?

Candlesticks show the price movement in a certain period, by using the trading day’s open, high, low and close. A candlestick is composed of a box which is called the body, whose length is the difference between the open and close, and thin vertical lines that are called the shadows above and below the body, representing the high and low prices reached during the day. A bullish day with a closing price higher than the opening price is shown by a white (hollow) body; while a bearish day with a closing price lower than the opening is shown by a black body. The body becomes a short horizontal line when the opening and closing prices are equal. In this case the candlestick is called a Doji, which usually signifies indecision in the market.

Though single candlesticks convey valuable information about the changes in a market’s supply and demand balance, a succession of candlesticks taken together, are more pertinent for this purpose as they make a pattern. The superiority of candlestick patterns over other technical analysis tools in forecasting medium and particularly short term direction is proven. Forecasting with candlesticks requires the proper identification of more than eighty different patterns and a well behaved continuous set of data with no missing observations.

Why Candlesticks?

The charts above show how candlestick patterns may mark important reversal points in the history of a stock. Though similar success should not be expected in all trades, it is clear that candlestick charting and analysis is an effective tool and a powerful method for stock and commodity market timing and analysis. Candlesticks provide visual insight into current market psychology. The use and interpretation of candlesticks in technical analysis is based on certain premises:

1. The “what” (i.e. the price action) is more important than the “why”, (i.e. news, earnings, etc.).
2. All the known information is reflected in the current price,
3. The buyers and the sellers move markets on the basis of psychologically driven emotions of fear, greed and hope,
4. The actual price may not reflect the underlying value.

Traders can use either fundamental analysis or other methods of technical analysis together with the candlesticks as decision criteria. The message inherent in candlesticks, however, is more important since they give insight to what the market is thinking and must never be neglected. Candlesticks offer the unique opportunity for the early identification of reversals which enables our system to establish the stop loss and confirmation levels in time.

Use of Candlesticks

Single candlesticks give valuable information about the psychology and underlying price dynamics of the market, especially when they are interpreted in the light of all the possible news and fundamental facts about a security. Candlesticks observed at significant support and resistance levels particularly deserve serious consideration as bullish or bearish reversal signals. However, due attention to the direction of the prior trend is always warranted. Experienced technical traders prefer to rely more on patterns of two or more successive candlesticks rather than single candlesticks in assessing the likelihood of a reversal. Successful trading also requires waiting for the confirmation of a pattern before an act of buying or selling, even in cases in which the patterns have a high success ratio of reversal prediction. This patience is required because sometimes a pattern can emerge as a result of a very short trend or a horizontal move and it may never be confirmed. In such cases of non-confirmation, it is better to wait in order to avoid a losing trade and until the emergence of a new pattern (if the stop loss was not triggered during this period).