Japanese candlestick charts are a visual representation of the battle between bulls and bears taking place in the market. It takes time for this battle to take shape. Candlestick patterns on the very short time frames used for scalping and some other day trading strategies may not provide signals that can be properly interpreted and traded.
In the last decade, e-commerce has become very popular. What this means is that a significant volume of trading takes place outside of normal market hours. This trade can cause patterns to appear that do not reflect the full picture on a candlestick chart.
For example, ABC shares are listed on the NYSE. NYSE officially opens at 9:30 am EST for trading. The opening price of ABC stock is $60 per share. However, this stock had been trading on the electronic network in the pre-market hours at as low as $59. Now, the opening on the New York Stock Exchange may not be a true reflection of where the stock had initially been trading that day.
What this means is that the opening recorded on the Japanese candlestick chart is not accurate. Now suppose that ABC stock never goes below $59 during the day. Therefore, the low on the candlestick chart may not be an accurate representation of the day’s price action.
Therefore, electronic trading makes these charts somewhat inaccurate. Combine this with the fact that on short timeframes, candlestick charts are not very accurate. These charts are good for time frames of 1 hour or more. Just keep these two limitations of candlestick charts.
Other than that, candlestick charts are a powerful tool in the hands of an experienced trader. When an experienced trader combines these charts with technical indicators, this combination can produce very accurate trading signals.
Candlestick patterns can be a good buy and sell signal when combined with a technical indicator like RSI or Stochastic. There are simple and complex candlestick patterns. One-stick candlestick patterns are easy to spot, however two-stick and three-stick candlestick patterns don’t show up very often, but when they do they are very accurate and can be very profitable to trade!
Now, Yahoo Finance is a great free resource that you can use to create candlestick charts for any stock just by entering the stock’s ticker symbol. You should play around with the options available for Yahoo Finance. This will help you learn a lot of new things about candlestick charts.
