SchoolFeature Corner Special
Candlestick analysis first emerged in the 1600s in Japan. The Japanese used this method of analysis to analyse the price of rice contracts. This technique is called candlestick charting. Today, candlestick charts are widely popular with day/swing traders where they are used to analyse the financial markets. Candlestick charts are slightly different from conventional bar charts; they display the open, high, low and closing price, but in a different format. Instead of seeing the price action on a bar, each candlestick has a real body which is coloured.
If the closing price is lower than the opening price, the real body is black (or red). If the closing price is higher than the opening price, the real body is white (or blue or green).
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A white candlestick indicates bullish price action as the close is higher than the open. A black candlestick, on the other hand, is bearish. Some important signals are given by a single candlestick; others are based on a series of two or three candlesticks. The analyst looks for patterns that are created by the position of two or three consecutive candlesticks. There are essentially two types of patterns — continuation and reversal ones.
Each candlestick represents the price action in a period (day, hour...). The advantage of using candlesticks is in the immediacy of the visual message. Important turning points in the market can be easily identified by looking at the position, size and colour of the real body. Most charting tools use the colours green and red, or blue and red in the real body, others use black and white.
72 | www.financial-spread-betting.com | September 2012
Continuation patterns occur in the middle of a trend (where the momentum indicator, be it the RSI, MACD or any other, is neither overbought nor oversold). The following patterns are continuation patterns: