Candlestick

Candlesticks

Candlestick charts are thought to have been developed in the 18^th century by legendary rice trader named Munehisa Homma from the town of Sakata, Japan.

Formation

A candlestick is composed of 2 parts:

1.      A real body (white or black)

2.      Shadows (upper & lower)

A candlestick carry a message shown open, close, high and low values for a time period.

Here are 2 important aspects we should pay attention:

1.      Length of body

2.      Length of shadow

Length of body

Generally speaking, the longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent consolidation.

Long white candlesticks show strong buying pressure. This indicates that prices advanced significantly from open to close and buyers were aggressive. While long white candlesticks are generally bullish, much depends on their position within the broader technical picture.

Long black candlesticks show strong selling pressure. This indicates that prices declined significantly from the open and sellers were aggressive.

Length of shadow

The shadow length actually indicates the buyers and sellers status. The shadow length can provide a answer to buyers and sellers’ position. Is the dominating side still in advance position? They are in exhausted position currently?

Long Upper Shadow

Long upper shadow means the price being pressed down by the selling pressure, they unable to push the price to a higher level. The buyers are exhausted; sellers make a counter on the uptrend. The longer the upper shadow, the more exhausted the buyer is.

Long Lower Shadow

Long lower shadow means the price being push up by the buying pressure, they unable to push the price to a lower level. The sellers are exhausted; buyers make a counter on the downtrend. The longer the lower shadow, the more exhausted the seller is.

Combined the two aspects and put it into observation, it can conclude that:

1.      A white candlestick with long lower shadow indicated strong buying pressure; the buyers are dominating the trading.

2.      A black candlestick with long upper shadow indicated strong selling pressure; the sellers are dominating the trading.

3.      Long upper shadow and long lower shadow both exist at the same time; this indicated buying and selling pressure are equal. The highest point in the time period is a strong resistance, while the lowest point is a strong support. The longer the shadow, the stronger the support and resistance have been.

Continue to Step 6: "Simple Moving Average (SMA)"


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