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Sunday, September 14, 2008

Japanese Candlesticks

While we briefly covered candlestick charts in the previous lesson, we’ll now dig in a little and discuss them more in detail. First let’s do a quick review.
What is a candlestick?

More than 200 years ago, the Japanese were using their own style of technical analysis in the rice market. This style evolved into the candlestick technique now used worldwide. Candlestick charts are a useful stand alone tool.
They can be merged with other technical tools to create the ultimate fighting technique. Certain candlestick combinations may imply a period of consolidation. Others may hint of a forceful price move.

Candlesticks are formed using the open, high, low and close. If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn. If the close is below the open, then a filled candlestick (usually displayed as black) is drawn. 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.

And knowing this provides you with important information about price action and forms the essence of candlesticks.

Long versus Short Bodies
The longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent indecision between the bulls and the bears. Bulls are buyers and bears are sellers.

Long white candlesticks show strong buying pressure. The longer the white candlestick, the further the close is above the open. This indicates that prices increased considerably from open to close and buyers were aggressive. In other words, the bulls are kicking the bears’ butts big time.

Long black candlesticks show strong selling pressure. The longer the black candlestick, the further the close is below the open. This indicates that prices fell a great deal from the open and sellers were aggressive. In other words, the bears were grabbing the bulls by their horns and body slamming them.

Long versus Short Shadows
The upper and lower shadows on candlesticks can provide valuable information about the trading session. Upper shadows represent the session high and lower shadows the session low.
Candlesticks with short shadows indicate that most of the trading action was confined near the open and close.

Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated during the session and bid prices higher. However, sellers later forced prices down off of their highs and the weak close created a long upper shadow.

On the other hand, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the session and drove prices lower. However, buyers later resurfaced to bid prices higher by the end of the session and the strong close created a long lower shadow.

To be continue...

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