by Mike Lally
When you look at your charts, do you understand everything they’re telling you?
The majority of trading and investing text books and magazines display price using bar charts (OHLC charts). Of course, they are more than adequate to inform the trader of price movement. However, candlesticks are becoming more popular.
In this series we look at the reasons why the popularity is continuing to grow.
Traditional price patterns, which occur in bar charts, can equally be represented by candlesticks.
Whether it’s triangles, flags, pennants, head and shoulders or cup and saucers, a corresponding candlestick chart provides the same information.
The precise opposite can be said: candlestick chart information can be recognised by a corresponding bar chart.
Not every trader or investor fully understands everything a price chart is suggesting.
Often interpretation can differ widely between two traders viewing the same chart.
This is natural conditioning and we tend to see what we want to see.
I believe it is worthwhile changing from bar charts to candlesticks for most traders and investors.
I think it is much easier to see what’s really going on.
Even though both are graphical in format, the candlestick does allow the trader to see many patterns, which are often overlooked in the traditional bar chart.
When I write “traditional”, I am referring to Western displays of data because candlesticks have actually been around for an extremely long time.
They are enduring, durable, informative and frequently more intuitive.
Given candlesticks have numerous patterns which have unique names it starts to become easier to recognise them. This gives candlesticks a distinct advantage over bar charts or line charts.
The corresponding bar chart can still be seen, but often they do not have an identifiable name. This makes it possible to overlook or ignore a specific pattern. It is also true
Familiarity with a dozen or so patterns, in particular reversal patterns, is normally more than sufficient.
Once you have a grip on some important candlestick patterns,
particularly those consisting of more than one individual bar, it can help you to identify potential turning points at a glance.
The graphic above displays the basic open, high, low close of
both a bar chart and the corresponding candlestick chart.
At first glance they look radically different, don’t they?
MORE ON CANDLESTICKS IN PART 2!