How To Read Candlestick Charts

A candlestick chart is simply a chart composed of individual candles, which traders use to understand price action. Candlestick price action involves pinpointing where the price opened for a period, where the price closed for a period, as well as the price highs and lows for a specific period.
The period that each candle depicts depends on the time-frame chosen by the trader. A popular time-frame is the daily time-frame, so the candle will depict the open, close, and high and low for the day. The different components of a candle can help you forecast where the price might go, for instance if a candle closes far below its open it may indicate further price declines.

The image below represents the design of a candlestick, There are three specific points (Open, Close, Upper Wick'shadow', Lower Wick'shadow')

Open Price - The open price depicts the first price traded during the formation of the new candle
High Price - The top of the upper wick/shadow indicates the highest price traded during the period.

Low Price - The bottom of the lower wick/shadow indicates the lowest price traded during the period.

Close Price - The close price is the last price traded during the period of the candle formation

The Wick - The wicks also referred to as 'shadows' are the extremes in price for a specific charting period.

Direction - The direction of the price is indicated by the color of the candlestick. If the price of the candle is closing above the opening price of the candle, then the price is moving upwards and the candle would be green  

Range - The difference between the highest and lowest price of a candle is its range, could be calculated as (Range = highest point – lowest point).

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The Limitations Of Technical Analysis

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. It is often used by traders to help them make decisions about buying and selling securities. However, there are several limitations to using technical analysis that investors should be aware of.

Technical analysis is based on the assumption that market trends, which are derived from past prices and volume data, will continue into the future. This is not always the case, as market conditions can change quickly and unexpectedly, leading to sudden shifts in trends. Therefore, technical analysis should not be relied upon as the sole basis for making investment decisions.

Technical analysis is a backward-looking tool, meaning that it only considers past market data. This means that it does not take into account any external factors, such as economic news or global events, that may affect the market in the future. As a result, technical analysis may not provide a complete picture of the market, and investors should consider other factors before making investment decisions.

Technical analysis is subject to interpretation, and different traders may use different methods and techniques to analyze the data. This can lead to different conclusions being drawn from the same data, which can be confusing and misleading for investors. Therefore, it is important to understand the assumptions and methods used in technical analysis, and to consider multiple sources of information before making investment decisions.

In summary, technical analysis is a useful tool for traders, but it has several limitations. It is based on the assumption that past market trends will continue, it does not take into account external factors, and it is subject to interpretation. Therefore, investors should use technical analysis as one of several tools in their decision-making process, and should not rely on it solely.

Key Terms Used In Technical Analysis

There are several key terms that are commonly used in technical analysis. Some of these include:

Trend: A trend is the general direction of a market or security. Trends can be up, down, or sideways.

Support and resistance: Support and resistance are levels on a price chart where the price has either a difficult time falling below (support) or rising above (resistance).

Moving averages: A moving average is a statistical measure that smoothes out price data over a given time period. Moving averages are used to identify trends and can help traders identify potential entry and exit points for their trades.

Indicators: Indicators are mathematical calculations that are used to forecast future price movements. Some common indicators include the relative strength index (RSI), the moving average convergence divergence (MACD), and the stochastic oscillator.

Chart patterns: Chart patterns are specific formations on a price chart that are believed to predict future price movements. Some common chart patterns include head and shoulders, triangles, and wedges.

Asset Price: The price of an asset is the that the asset is currently being sold for.

Asset Value: Value is based on the underlying fundamentals of an asset. Investors who focus on value look for assets trading at a lower price than their intrinsic value.

By understanding these key terms, traders and investors can better understand the market and make more informed decisions about their trades. Technical analysis is not a perfect science, but it can be a useful tool for identifying potential trading opportunities.

What Is Technical Analysis?

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. It is primarily used to forecast the direction of prices through the study of past market data, primarily price and volume.
Technical analysts believe that market trends, as shown by charts and other technical indicators, can predict future activity. They use a variety of tools and techniques to analyze the market and identify trading opportunities.

One common tool in technical analysis is the use of technical indicators. Technical indicators are mathematical calculations based on market data, such as price and volume, that are used to forecast future price movements. Some common technical indicators include moving averages, relative strength index (RSI), and stochastic oscillator.

Technical analysts also use various chart patterns to forecast price movements. These patterns, such as head and shoulders and triangles, are formed by the price action of a security and can be used to identify buying and selling opportunities.

It is the primary knowledge to know before engaging into the market.
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