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Introduction.a
New Way to Look
at Prices
Would
you like to learn
about a type of
commodity futures
price chart that
is more effective
than the type you
are probably using
now? If so, keep
reading. If you
are brand new to
the art/science
of chart reading,
don't worry, this
stuff is really
quite simple to
learn.
Technical
Analysis.a Brief
Background
Technical
analysis is simply
the study of prices
as reflected on
price charts. Technical
analysis assumes
that current prices
should represent
all known information
about the markets.
Prices not only
reflect intrinsic
facts, they also
represent human
emotion and the
pervasive mass psychology
and mood of the
moment.
Prices are, in the
end, a function
of supply and demand.
However, on a moment
to moment basis,
human emotions.fear,
greed, panic, hysteria,
elation, etc. also
dramatically effect
prices. Markets
may move based upon
people's expectations,
not necessarily
facts.
A
market "technician"
attempts to disregard
the emotional component
of trading by making
his decisions based
upon chart formations,
assuming that prices
reflect both facts
and emotion.
Standard
bar charts are commonly
used to convey price
activity into an
easily readable
chart. Usually four
elements make up
a bar chart, the
Open, High, Low,
and Close for the
trading session/time
period. A price
bar can represent
any time frame the
user wishes, from
1 minute to 1 month.
The total vertical
length/height of
the bar represents
the entire trading
range for the period.
The top of the bar
represents the highest
price of the period,
and the bottom of
the bar represents
the lowest price
of the period.
The Open is represented
by a small dash
to the left of the
bar, and the Close
for the session
is a small dash
to the right of
the bar.
Below
is a standard bar
chart example.
Candlestick
Charts Explained
You
may be asking yourself,
"If I can already
use bar charts to
view prices, then
why do I need another
type of chart?"
The answer to this
question may not
seem obvious, but
after going through
the following candlestick
chart explanations
and examples, you
will surely see
value in the different
perspective candlesticks
bring to the table.
In my opinion, they
are much more visually
appealing, and convey
the price information
in a quicker, easier
manner.
What
is the History of
Candlestick Charts?
Candlestick
charts are on record
as being the oldest
type of charts used
for price prediction.
They date back to
the 1700's, when
they were used for
predicting rice
prices. In fact,
during this era
in Japan, Munehisa
Homma become a legendary
rice trader and
gained a huge fortune
using candlestick
analysis.
He
is said to have
executed over 100
consecutive winning
trades! The candlesticks
themselves and the
formations they
shape were give
colorful names by
the Japanese traders.
Due in part to the
military environment
of the Japanese
feudal system during
this era, candlestick
formations developed
names such as "counter
attack lines" and
the "advancing three
soldiers".
Just
as skill, strategy,
and psychology are
important in battle,
so too are they
important elements
when in the midst
of trading battle.
What
do Candlesticks
Look Like?
Candlestick
charts are much
more visually appealing
than a standard
two-dimensional
bar chart. As in
a standard bar chart,
there are four elements
necessary to construct
a candlestick chart,
the OPEN, HIGH,
LOW and CLOSING
price for a given
time period. Below
are examples of
candlesticks and
a definition for
each candlestick
component:
The
body of the candlestick
is called the real
body, and represents
the range between
the open and closing
prices. · A black
or filled-in body
represents that
the close during
that time period
was lower than the
open, (normally
considered bearish)
and when the body
is open or white,
that means the close
was higher than
the open (normally
bullish). ·
The
thin vertical line
above and/or below
the real body is
called the upper/lower
shadow, representing
the high/low price
extremes for the
period.
Bar
Compared to Candlestick
Charts
Below
is an example of
the same price data
conveyed in a standard
bar chart and a
candlestick chart.
Notice how the candlestick
chart appears 3-dimensional,
as price data almost
jumps out at you.
(
3a )
(
3b )
The
long, dark, filled-in
real bodies represent
a weak (bearish)
close ( 3a ), while
a long open, light-colored
real body represents
a strong (bullish)
close ( 3b ). It
is important to
note that Japanese
candlestick analysts
traditionally view
the open and closing
prices as the most
critical of the
day.
At
a glance, notice
how much easier
it is with candlesticks
to determine if
the closing price
was higher or lower
than the opening
price.
Common
Candlestick Terminology
The
following is a list
of some individual
candlestick terms.
It is important
to realize that
many formations
occur within the
context of prior
candlesticks. What
follows is merely
a definition of
terms, not formations.
·
The Black Candlestick
-- when the
close is lower than
the open. ·
The
White Candlestick
-- when the close
is higher than the
open. ·
The
Shaven Head --
a candlestick with
no upper shadow.
The
Shaven Bottom --
a candlestick with
no lower shadow.
·
Spinning
Tops -- candlesticks
with small real
bodies, and when
appearing within
a sideways choppy
market, they represent
equilibrium between
the bulls and the
bears. They can
be either white
or black. ·
Doji
Lines -- have
no real body, but
instead have a horizontal
line.
This
represents when
the Open and Close
are the same or
very close. The
length of the shadow
can vary.
Candlestick
Reversal Patterns
Just
as many traders
look to bar charts
for double tops
and bottoms, head-and-shoulders,
and technical indicators
for reversal signals,
so too can candlestick
formations be looked
upon for the same
purpose.
A
reversal does not
always mean that
the current uptrend/downtrend
will reverse direction,
but merely that
the current direction
may end. The market
may then decide
to drift sideways.
Candlestick
reversal patterns
must be viewed within
the context of prior
activity to be effective.
In fact, identical
candlesticks may
have different meanings
depending on where
they occur within
the context of prior
trends and formations.
·
Hammer
--a
candlestick with
a long lower shadow
and small real body.
The shadow should
be at least twice
the length of the
real body, and there
should be no or
very little upper
shadow. The body
may be either black
or white, but the
key is that this
candlestick must
occur within the
context of a downtrend
to be considered
a hammer. The market
may be "hammering"
out a bottom. ·
Hanging
Man --identical
in appearance to
the hammer, but
appears within the
context of an uptrend.
Engulfing
Patterns --
Bullish -- when
a white, real body
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