Japanese rice traders began using candlestick charts some two centuries before the first chartists appeared in America. Instead of bars, these charts have rows of candles with wicks at both ends. Candlesticks are thus graphical representations of price movement for a given period of time formed by the opening, high, low, and closing prices of stock, commodity or future.
Candlesticks provide an easy and valuable picture of price action. One can see immediately the relationship between the open and close, as well as between the high and low. The relationship between the open and close is considered vital information and forms the essence of candlesticks.
If the opening price is above the closing price then a filled (normally red or black) candlestick is drawn. If the closing price is above the opening price, then normally a green or a hollow candlestick (white with black border) is shown.
Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure. The filled or hollow portion of the candle is known as body or real body, and can be long, normal, or short depending on its proportion to the line above or below it. The lines above and below, known as shadows, tails, or wicks represent the high and low price ranges within the specified time period. However, not all candlesticks have shadows.
The main advantage of a candlestick chart is its focus on the struggle between amateurs who control openings and professionals who control closings. Unfortunately, most candlestick chartists fail to use many tools of Western analysts. They ignore volume and have no trendlines or technical indicators. These gaps are being filled by modern American analysts such as Greg Morris, whose Candlepower software combines Western technical indicators with classical candlestick patterns.
The Hammer is comprised of one candle. It is easily identified by the presence of a small body with a shadow at least two times greater than the body.
Mktgeist does not look for simple hammer signals, but for hammers occurring in oversold or overbought conditions. A hammer occurring in oversold reduces the risk of a potential long trade.
The morning star candlestick pattern can generally be found after a downtrend and indicates that the selling pressure may be over. The signal is formed in a period of three days. The first day of the signal must be a long dark body. The second day must be a day of indecision. This is the star of the formation. The third day should be a long white candle reaching at least halfway into the body of the first day’s dark candle. The optimal morning star signal would have a gap before and after the star day.
Mktgeist does not look for simple morning stars, but for morning stars occurring in oversold conditions. A morning star in oversold reduces the risk of a potential long trade.
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