A candlestick chart is a technical analysis tool which is a bar chart applied to demonstrate price movements of an asset trading at a market over time. It is a combination of a line-chart and a bar-chart with each bar or “candle” showing the range of price movements over a given time interval. It is used by traders to detect market sentiment of an equity, derivative or currency which are not always only driven by fundamental factors.
Candlesticks are rectangular vertical boxes with vertical lines, one extending up and another extending below called shadows. The vertical body, the “candle,” shows the opening and closing prices for the asset of the day, and the shadows show the high and low prices for the day. If the candle is white, the prices are up that day and, conversely, are black if prices are down that day. However more trading systems are replacing black and white with red for a lower closing and green for a higher closing.
Candlesticks supposedly came from 17th century Japanese rice traders who observed that price patterns repeat themselves, and to the observant trader, this could mean trading profits. Today, Candlestick charts also convey more information than say the open-high-low-close form of charts. Candlesticks show absolute values and by their colors, they show prices relative to the prior periods’ prices, so that you can tell if the price action is higher or lower from the previous period. Some signaling systems even allow for candlesticks to be designed to show open-high-low-close for a specified volume range, e.g. 1,000, 100,000, or 1 million shares per candlestick. With time, 42 definitions of price movement have emerged with handbooks readily available to define pricing action for the trader. Understanding the pricing action can be the signal the trader needs to trade profitably.
This is very important for the binary option trader because they should know what is the price action of the equity underlying the option, since investor sentiment can diverge from fundamental economic news. Candlesticks can show changing market sentiments which can direct your trading strategy. Here is an example, a Doji is a flat candlestick with varying wicks. This indicates that the open and closing prices were very close yet trading during the day was high and low. If this candlestick shows up in a well established market, a reversal could be imminenet. Let’s say that you have been observing the US NASDAQ market which has been on a down trend, and the Doji pops up. After checking some fundamentals, you may want to place a buy call trade to catch the newly emerging bullish trend.
You can use candlesticks to trade a market index, an individual stock, or even Forex with binary options. Candlesticks visually quantify the market, and are easy to read. Thus a trader should not miss key market signals leadin to bad trades. Also, candlesticks can be overlayed on fundamental charts to gain better visabiloity of market action. Many a successful trader has used candlesticks to reach their goal of super profitable traading.