Technical Analysis - 1

Well continuous insistence by Priyabrata, forced me to post on Candle Stick Pattern of Technical Analysis. But before proceeding further I would like to make a point about Technical Analysis or Candle Stick! As I always say, “knowing technical analysis is not important but implementing is what is important here."

Okay, let’s begin the play ball....

Candle Stick Charts

Candle sticks (300 years old Japanese techniques) give the same information as a bar chart but are visually easier to read.

Red candle means stocks closed lower to relative to the previous close. green candle stick means stock higher relative to the previous close. The color combination can be different also as such Black-White, Red-White and Green-Red etc.

History

In the1600s, the Japanese developed a method of technical analysis to analyze the price of rice contracts. This technique is called candlestick charting. Steven Nison is credited with popularizing candlestick charting and has become recognized as the leading expert on their interpretation.

Candlestick charts display the open, high, low, and closing prices in a format similar to a modern-day bar-chart, but in a manner that extenuates the relationship between the opening and closing prices. Candlestick charts are simply a new way of looking at prices, they don't involve any calculations. Each candlestick means one period data. One period data can be on daily basis, weekly basis, monthly basis, quarterly basis or yearly basis.

Formation

In order to create a candlestick chart, you must have a data set that contains open, high, low and close values for each time period you want to display. The hollow or filled portion of the candlestick is called "the body" (also referred to as "the real body"). The long thin lines above and below the body represent the high/low range and are called "shadows" (also referred to as "wicks" and "tails"). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body represents the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.


Compared to traditional bar charts, many traders consider candlestick charts more visually appealing and easier to interpret. Each candlestick provides an easy-to-decipher picture of price action. Immediately a trader can see compare the relationship between the open and close as well as the high and low. The relationship between the open and close is considered vital information and forms the essence of candlesticks. 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.

Interpretations

Interpretation of candlestick chart is based primarily on the patterns. Because candlesticks display the relationship between the open, high, low, and closing prices, they cannot be displayed on securities that only have closing prices, nor were they intended to be displayed on securities that lack opening prices. If security that does not have opening prices, then use the previous day's closing prices in place of opening prices. This technique can create candlestick lines and patterns that are unusual, but valid.

The patterns can be categorized as follows

Ø Bullish Patterns

Ø Bearish Patterns

Ø Reversal Patterns

Neutral Patterns


---> Will be continued...