Stock traders are time and again advised to never trade impulsively and out of emotions but to rely on tactical strategies. Sadly, even then, this hardly happens. And this is one of the foremost reasons why candlestick charts have emerged to be the most reliable tool to predict market movements. The patterns on chart, which although are based upon certain formations – but beyond all the technical juggernauts – they basically underline the emotions of the stock market as a whole.
What is Candlestick Patterns?
If you aren’t already familiar with the term, candlestick pattern are a form of technical analysis which shows price movements using graphs. The programs used to recognize this pattern depend on predefined rules. So since subjective, candlesticks aren’t 100 percent foolproof. Yet they have proved to be quite high-rewarding, efficiently and successfully pinpointing market price structure, trend strength, buyer/seller dynamic, and eventually the future price movements.
Understanding Candlestick Patterns
It may seem like quite an easy task to leverage automated candlestick pattern programs for better trading decisions. However, analyzing candlesticks is a lot more complex, to be seen in sync with a range of other factors. If you’re just a beginner, here are 4 elements to help you get started with:
- Size of the body that represents the range between the open and closing prices. When it becomes larger, it shows an increase in momentum, and vice versa.
- Length of wicks that highlight volatility of price movements. When the wicks grow larger, it shows the price has moved a lot during the course of the candle, and vice versa.
- Ratio between wicks and bodies. During high momentum trend, long bodies go with small wicks. And when uncertainty and volatility rises, small bodies go with larger wicks.
- The position of the body which shows rejection and indecision. When long wick has a body on opposite side, it shows rejection. When there’s small body in the middle of a candle with long wicks, it indicates indecision.
Combine these elements together, there exist different types of candlestick patterns, ranging from Doji, piercing and cloud cover formations to engulfing, shooting star and harami formations. When analyzing your graph, you need to identify which formation it is and then also prioritize other factors before concluding – efficiently – on the price movement.
Of course, candlestick analysis isn’t easy. Neither does it guarantees success. But if you do all things correctly and hit the darts right the very center, you might just successfully start your journey of building a solid stock portfolio.