Japanese Candlesticks have been around for a long time. Legend has it that a certain Japanese rice trader became very rich and successful using these type of chart. It soon became very popular around the world when computers are used for trading.
Some advantages of Japanese Candlesticks are:
Once you learn how to interpret the candlestick, it opens up a wealth of information for you. Below is how a candlestick looks like. The green bar represents a green day where the stock opens lower and close higher. The red bar represents a red day where the stock open higher for the day but closes lower for the day. The two wicks at the top and bottom represents the highs and lows of the day.
The candlestick can show us who won the day or the period. This is very important at turning points in the market such as support and resistance areas. The green bar tells us that bulls are in control and have won the day. On the other hand the red bar tells us that the bears have won the day and are in control.
Perhaps the biggest benefit that you can gain from Japanese Candlesticks are the many continuation and reversal patterns that it offers. Some of them are really powerful and can tell us in advance important moves that a stock is about to make. You will learn about these patterns in later articles.
A bottoming tail reversal pattern formed in IBM in late October. It was a very powerful reversal signal especially when it happened at the 200 MA with heavy volume. Look how the stock reversed and moved higher.
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