If our game on the stock market is to be taken seriously, it requires basic skills from us, such as reading the price history. For many years, charting standards have included line charts, bars charts and Japanese candlesticks – simple to read one at a time, but slightly more problematic in a broader perspective. In the article we will explain the operation of Japanese candles and how to interpret the data they provide us to learn the necessary basics of the stock exchange.
Table of Contents
Four messages from Japanese candles
At first glance, candlestick charts may be a bit difficult to read, but each of them contains only four information:
- Candle opening price.
- Candle closing price.
- The highest price accepted.
- The lowest price accepted.
If the bull candles have long upper shadows, this may indicate the weakness of buyers. Conversely, the long upper shadow of the downward candle is rather a desirable phenomenon, as it indicates the rejection of higher prices and the victory of sellers.
The process of creating a given candle is equally important. It carries information about when and under what circumstances the sellers gained an advantage. To check this, just watch the price history on a lower time frames.
How to read the basic signals sent by candles
If the chart were the language of the market, then the candle would be a word, and their formation would be a phraseological relationship. Candles with their formations can be embedded in different contexts, which will more or less change their meaning. However, if you want to play the stock market, the basic ability to read candles will be insufficient. It is true that people starting to invest, reading price action will be the basis of their knowledge, allowing them to survive in the market, but over time we will understand something else. Namely, the interpretation of signals sent by candles is often used by banks on the stock exchange,which often want to manipulate the price.
In other words, you will certainly encounter a situation where the market will form a string of candles, which the average trader on the stock market will interpret as an obvious signal to make a trade. However, it should be realized that this signal will be false and will allow larger institutions to build liquidity in specific areas of the market, as well as to open or close large positions at the expense of its participants.
As our knowledge deepens, we need to expand our range of skills by correctly reading the data on the rotational volume and capturing more complex candle sequences in different time frames. This should save us from falling into typical traps.