Una of the most demanding tasks of trading is to observe the price patterns within the market with the aim of predicting the future price. To facilitate this task, specialists have created charts that synthesize this information in a useful way. One of those tools is called candle chart.
Of Japanese origin, the charts of candles is the quintessential tool of traders. These charts serve to represent current and past market price information. Data such as the opening price, the closing price, the highest price and the lowest price in a certain time interval are part of the information shown by this chart.
For them the so-called "candlesticks”Or candles, a symbol representing trading activity compressed by a single period (one minute, hour, day, month, etc.) Each candlestick is represented along a time scale in the X axis, to show commercial activity over time. While in the Axis y, the scale of prices reached in that time is represented.
This type of graphics are very useful for predicting market trends over time. They also serve to detect and interpret the "Market psychology". This refers to the everyday feel of the market, through the color and shape of each candlestick symbol. For example, the longer the body, the more intense the selling or buying pressure. Whereas a very short body would indicate that there is very little price movement in that time period and can be interpreted as consolidation.
In addition they also help to identify factors such as fear or greed of those who act within the market. A situation that puts traders on notice in a working day.
History of the candle chart
The story behind the candle charts puts us in Japan in the mid-XNUMXth century. The creator of this tool was Munehisa Homma, a renowned rice merchant, and who received the name of "The Samurai trader". In her daily work, Homma began to see repetitive patterns and signs on the price bars she drew before naming them. In this analysis, he managed to see configurations that are very popular these days (tapas, stars, doji, hammer, etc.).
Each model clearly conveys a special meaning and Homma was the first known human being to use these models to predict the future direction of rice prices. With the discovery of the analysis of the action of rice prices, Homma had a great advantage over other operators and combined with his passion and talent for trading.
This advantage has allowed her to become one of the greatest traders of all time. That was how he managed to get a significant fortune of close to 10 million dollars at that time. Later the technique was transferred to the West and began to be widely used in the mid-XNUMXth century.
Parts of a candle chart
The graph is made on a coordinate system x y y. Where he X axis, represents time, while the Axis y, represents the prices reached. Thanks to this representation, the candlestick charts can be adjusted in time, according to the needs of the market. This time setting is known as timerate, and typically represents units of hours, days, or weeks.
The main rectangle of the symbol is known as real body, and is used to display the range between the opening and closing price for that time period. While the lines that extend from the lower and upper parts of the actual body are known as lower and upper shadow (or wick).
Each shadow represents the highest or lowest price traded during the time period represented. When the candle is positive, the closing price is greater than the price at which the candle was opened. In these cases, the body is usually represented as white or green color. But when the candle is negative, the closing price is lower than the price at which it opened. In those cases the body is usually black or red color. Here we present it in an explanatory image:
How to read a candle chart?
To read a candle chart, it is important to keep in mind certain considerations. Among them we can highlight:
- It is essential Analyze the context in which the candle appears. That is, what happened before it was formed. Candle guidelines can never be considered in isolation. Well, depending on where they appear and the previous trend, they will have more or less relevance.
- It is important see the market trend. This will tell us if the candle patterns are consistent with the observed trend. This in turn makes it easier to recognize support and resistance in the price.
- Due to its characteristics of objectivity, candle chart guidelines, allow to perfectly establish the stop loss.
- Candlestick charting techniques are absolutely compatible with other market analysis techniques such as technical analysis o fundamental. That is why its consistent use together with these techniques will allow greater operational strength.
- El real body represents the range between opening and closing of the candle while the upper shadow (uwakage) represents the maximum of the sessionand the lower shadow (shitakage) represents the minimum.
- El The interior of said range varies in color depending on whether the closure is greater than the opening or if the closure is less than the opening.. Thus, the white or green color is used when the closure is greater than the opening. And the color black or red, when the closing is less than the opening of the candle line.
- A close above opening levels is a positive signal. Whereas if the closing is less than the opening, it is a negative signal.