Here we teach you how to use candlestick charts in order to trade successfully binary options. We’ve already talked about the nature of charts, how they are used and why they are useful tools in the field of technical analysis and trading, overall. We’ve also established that there are different types of charts, all of them serving their own purpose and having their own intricate objectives. The introduction continues with the so-called “candlestick charts”.
Candlestick charts aren’t anew phenomenon. In fact, they have been around since the 18th century, when a Japanese trader named Homma noticed an interesting trend. Like many others before him, he observed what everyone knows today – that the price of an asset is dictated by the levels of supply and demand. However, he also noticed that there was a another, more concealed factor that played a role in the market – emotions. Homma discovered that immense differences could occur between the value and the actual price of rice under the influence of emotions. This observation is still quite accurate today, which is why today’s candlestick chart analyses are based on Homma’s work as a way to measure the emotional component around a stock.
Today, candlestick charting is more popular than ever. They are very useful when a trader needs a short-term perspective. However, understanding a chart of this variety can be very difficult because they are quite complicated, so we will begin with the basics.
A candlestick chart can be confusing at the first glance, especially if you’re more familiar with other types of charts. It’s interesting how much information can be locked up in this simple structure. Once again, like in other charts, we have the opening and closing values, highest and lowest for the day, as well as comparative information concerning the difference between the opening and closing prices (whether the opening price was higher or lower than the closing price). Sound simple enough, but there are other intricacies we’ll have to scratch upon.
The candlestick has two main parts – a wider one and a thinner one. The wide one referred to as the “real body” of the chart and is used to represent the range between opening and closing price. If the body is filled (it’s usually filled with black or red), then the opening price was higher than the closing price. Intuitively, if the body is empty this tells us the opposite – that opening price was lower than the closing price.
The thinner parts of the chart are called “shadows”. You can see them located above and below the real body. They are used to show the high and low values for the day. Here’s where things get a bit trickier. The length of the shadows represents the difference between the high/low of that day and the opening and closing prices. If we have a filled real body and a short upper shadow, this means two things – that the opening price for the day was lower than the closing price; and that the open that day was closer to the high point.
If we have a short shadow on an empty body, this means that the closing price was closer to the high of the day. In short, the difference in the candlesticks represents the relationships between the highs/lows if the day and the opening and closing prices. We know that it sounds a bit complicated at first, but once you actually look at a few charts, decoding the information contained on them will become a breeze for you.
Why are candlesticks important? Any self-respecting trader should be able to read candlesticks and any other form of chart there is. The more information a trader is able to extract from various sources, the more accurate predictions he is going to be able to make. This is not just another annoying thing you have to learn for no apparent reason. Information is the most important aspect of trading. If you can get information and data, you stand a much better chance at making the right predictions and thus winning in the game of economics. This is something Japanese rice traders knew 300 years ago and it is as accurate now as it has ever been. The emotions surrounding the asset have an impact the price movement. You need to able to read those emotions. The question is, are you up for the task?