Candlestick Patterns: How An 18th Century Japanese Chart Helps Investors Today

If you think chart analysis is new, you are wrong. If you think chart analysis originated in the western world, you are again wrong. You will see how an 18th-century Japanese technique is helping investors daily, even today.

Candlestick charts were used by Japanese traders in the 18th century. This chart is a simple replacement for line charts. This chart provides more information than the line charts. This chart is used by traders, institutions, fund managers and researchers worldwide. Now you will see what exactly is a candle chart and three common patterns…

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A candlestick chart is an advanced version of a line chart. This chart is a combination of line and bar charts. A line chart usually represents the closing price, while a candlestick represents both open and close prices. If the close price is higher than the open price, then the candle will be in green or white. If the close price is lower than the open price, the candle will be in red or black color. (Also, you will find highest and lowest prices for a day.) Now you will see a very basic use of these charts.

The height of a candlestick is an indicator of volatility for a day. If the bar is shorter than the previous day, the stock is less volatile compared to the previous day. The opposite is also true. Now you will see 3 important chart patterns.

Since every one of us is more interested in the bullish trends than bearish, I am sticking to three 3 bullish patterns. (In case you want to learn bearish patterns, there are plenty of places like Wikipedia and Investopedia.)

1. Single Bullish Candle

If there is one bullish pattern prediction with least accuracy, then you have it here. This pattern is used by day traders. The pattern is as simple as this: A long white or green candle yesterday indicates a bullish trend today.

2. White Candle Engulfing Black Candle

White Engulfs Black Candle

Consider any two consecutive days. Assume the first candle is a small black/red one and the second a long white/green one. If the white/green candle is big enough to completely engulf the black/red, hurray! You have spotted a bullish trend.

3. Black Candle Followed By A Cross

Cross After Black Candle

Assume a stock is falling for the past few days or weeks. Assume you are clinging to the stock for whatever reason. One day, you see a cross. A cross says that the stock closed at the same opening price. Now maybe its time to regain your happiness. A pattern such as this may indicate a trend reversal and a possible bullish trend from the next day onwards.

Hope you find the post helpful. Leave your comments below.

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