How Does Candlestick Work in Trading?
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Traders use Candlestick to manage their portfolios of stocks and investments. It is an all-encompassing platform that allows users to manage all the information they need to know about stocks, exchange rates, and other economic conditions. It is very user-friendly, and anyone can use it. But what does Candlestick do? It uses the blockchain to store all the data about stocks, exchanges, and other economic conditions. And it also uses algorithms to watch over the performance of these markets and make informed decisions. This article discusses how Candlestick patterns work in trading.
Candlestick Components
When it comes to Candlestick, there are several components that we must take into consideration before getting a better understanding of how it functions. We should first look at the two most important parts of this system:
The upper candle and lower candle
As you may already know, Candlestick charts represent price movements on a horizontal scale for periods ranging from one minute to one year, depending on the type of chart. Therefore, each line represents the price movement or change over a given period (sometimes referred to as the timeframe). To understand how Candlestick charts work, let’s have a quick look at the Candlestick lines themselves. Each of them comprises four parts: A body, a base, a top, and a shadow. These elements help us better understand how the lines will behave when prices rise or fall.
The body describes the actual shape of the line. The longer the line, the higher the price. So if the body has three thin lines, it implies the price has fallen by three points within that particular time frame. If the body has just two long lines or none, it indicates that the price has risen by some amount. However, if the body has two thick lines and one thin line, it indicates that the price was raised by two points while falling only one point.
The open and close price levels
This part is especially useful when comparing the price level between different time frames. For example, when the current market price is USD 100, we can see how much the price fell from its opening range (i.e., the open price) to its closing range (i.e., the close price). By looking at the difference between these ranges, we can easily determine the volatility or volume of activity that took place during those times. You may be surprised to find out that if the price rose throughout the whole day but closed right after the close price, the number is usually negative. That means the volume was low, which tells us that interest in the stock was not high. Conversely, if the price opened around the same time and then traded steadily until after the close price, there would be lots of interest in the company. It is possible to trade based on the close-range alone, too; however, this method requires us to pay careful attention to the gaps between the relative values.
The Open, High, Low, and Close Price Values
It is easier to understand the meaning behind these numbers using an example. Say that the price closes today at USD 96.36 and opens tomorrow morning at USD 97.80. Then the close price is higher than the open price, which shows us that the price moved upwards. Similarly, if the close price is lower than the open price, then the price declined yesterday. Now let us look at how Candlestick works.
How Candlestick Work
Candlestick diagrams are used to identify trends and patterns. They show past price changes as well as potential future ones. When analyzing a candlestick chart, you need to consider what caused the price to move either upward or downward. This factor will affect your trading decision and can predict future outcomes more accurately.
Candlesticks come in five types–the Hammer, Shooting Star, Doji, Zig-Zag, and Harami. They differ according to their line style, size, color, and even whether the shadow appears above or below the body. Also, every candle is considered independent, with no relationship between them whatsoever.
Types of Candles
A Hammer Candle comes up when the price moves sharply downwards in a short period. On both sides of the price level, there is a trend. A hammer symbol is also known as a bearish candlestick, which is drawn like a clenched fist with the thumb extended outward.
A Shooting Star Candle occurs when the price continues to rise for a long period. Typically, these candles end when the price reaches resistance levels, as shown by the blue square. These candlesticks are also called bullish candlesticks.
A Doji Candlestick starts when the price first rises and later falls back up again. Sometimes it’s just a single line. However, when it consists of two parallel horizontal lines, it becomes a doji. A doji pattern looks similar to a pin bar. The only difference is that in the case of a pin bar, the left-hand side is longer, and the right-hand side has smaller bars.
When the opening price is higher than the closing price, the entire candle is filled with white space, showing that the price decline was significant. This type of Candlestick is often referred to as a Bearish Engulfing Pattern.
A Zig-Zig Candlestick happens when the opening price is below the closing price. Both the opening and closing prices rise and fall together, indicating that whatever happened earlier strongly influenced the price movements. These candlesticks have wavy lines instead of solid lines. They can also be described as a Bullish Piercing Pattern.
Conclusion
So now you know about Candlestick Patterns and how they work. Try applying this knowledge while interpreting candlestick charts. You should now be able to determine what kind of pattern is being formed and whether it is going to continue or not. Remember to look closely at all the details before making any trading decisions. This will ensure that you gain a better understanding of the market sentiment.
