Saturday, December 15, 2007

Candlestick Indicators - An Introduction and a Few Online Trading Basics

There are three main type of indicator representing price movement during any particular time span and the candlestick is probably the most popular. It is the easiest to read and can be tailored to one's visual preference. Needless to say, its shape resembles a candle and depending on price movement, will show a wick at either or both ends.

The basic candlestick appearance is made up of a rectangular body that has a lines protruding from its top and bottom ends, centrally, just like the wick of a candle. Its usual appearance is that irrespective of the wicks, a solid body represents a rising price during the chosen time span and a hollow body for a price drop. Occasionally you may also see a single horizontal line, this represents no price movement at all.

Sometimes a preference of colour makes a candlestick visually this easier to interpret. I use blue a rising price and red for a drop. You can also use just an outline for the body if you wish. Your charting software will allow full manipulation.

In the case of a price rise, the position of the lower end of the body indicates the price at which the trade opens. The tip of the lower wick, if there is one, indicates the lowest price at any time, the tip of the upper wick, the price at any time of highest price and the upper end of the body, the closing prise. There are several candlestick formations and each has its own message with regard to market sentiment.

In terms of a price drop during the time span for which the candlestick is set, the criteria above is of course reversed. Depending upon how your chart is set up, if you are trading by scalping, you will likely be able to observe the candlestick form changing before your eyes. On a set up showing daily closing prices for instance, you will usually only see the static representation of the summary of the previous day.

A trending market sentiment is usually represented by what could be construed as a normal candlestick that has a body with enough length to look like a body, irrespective of wick length. The length of the body in this sense is a measure of the strength of sentiment.

If the body of the candlestick shrinks to being just a horizontal line, it can often suggest a trend reversal, which depending upon what other indicators are showing may prompt an entry or exit position. It can take on one of three appearances, a cross, a letter T or an inverted letter T.

There are clearly some benefits of opting for candlestick representation of price movement and experimentation on your software will, I believe, justify this. They certainly make trading easier for me.