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How to use Candlesticks to understand market behavior?

How to use Candlesticks to understand market behavior?
Asked by
Sam Button categorie-icon time-icon6 months ago
1 Answer Answer Question

Justin Freeman
Answered time-icon6 months ago

Candlestick charts form the basis of Technical Analysis but just studying them at a higher level shows how useful they are regardless of the strategy you are adopting.

Whilst chartists will make a detailed analysis of individual candlesticks and trade off the patterns they make the core principles of a single candle are important to understand. It’s not by chance that these types of charts are set to default on all the broker platforms.

Taking the price of BT Group PLC for example:

The platform IG has the default candlestick chart as below for Daily price moves:

The ‘Line’ chart shows the data for the same period as:

The time horizon of your strategy will influence time intervals you set your dashboard to. The chart for hourly price moves is as follows:

A trader investing over a longer period of days or weeks would lean towards using the Daily chart and a shorter term trader the Hourly chart.

There is of course the possibility of setting the time scale to minutes. The same instrument, BT Group OPLC has the 1m chart as below:

On the Daily price chart we can see on candle for 31st Jan that is longer than the rest and associated with an increase in traded volumes. The black arrows on the below chart highlight the bars in question. The candlestick itself has an opening price of 224, Low of 221, high of 238 and close of 232. Candles that show bullish trading are typically green or white and bearish candles are black or white; though you can customize the personal settings according to preference.

The platform has a news function that is easy to access and shows that on 31st Jan 2019 BT announced quarterly results that were better than expected.

The detail being as below:

So we have a candlestick pattern, something associated with Technical Analysis actually proving a useful tool by highlight to a Fundamental Analyst the day that the company reports were released.

Candlesticks are a great tool for chartists, who can make a living off them and they are also a simple and effective way of representing price action (and more) for all traders.

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