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Candlestick Pattern Indicator - The Psychology Behind the Numbers by Art Gib
Everyone knows what a typical bar chart looks like, with its vertical lines showing at a glance how a variable (whether it be a market trend or population decline) has progressed. In the foreign exchange market, charts are used for purposes of analyzing trends and charting projections based on those trends. These bar charts do not take into consideration anything other than numeric data.
At first glance, candlestick charts are basically the same thing as bar charts, except that the presentation is different. Instead of lines, shapes and shadows are used to indicate trading highs and lows as well as open-to-close ranges. Developed in the Far East, these patterns (or indicators) can be interpreted to reveal the psychology of any market at a specific point in time.
The fact that market activity has been tracked for more than a century with candlestick charts in the Far East means that market analysts there have had an enormous set of historical market data with which to work, and this is where the difference really lies. Although the reliability varies considerably (depending on such variables as the amount of time over which a trend has established), analysts have been able to identify certain patterns that may determine the future short-term trend for a particular investment.
The candlestick pattern indicator has become of great interest to Western traders over the past two decades as investors and analysts alike are beginning to understand how emotions driving a particular investment impact directly on whether to buy, sell or hold. The learning curve on how to correctly interpret a candlestick pattern indicator obviously begins with studying what the shapes and shadows mean, and then seeing if a trend is indicated.
For example, if you see a two-dimensional rectangle (which is called the "real body"), you are looking at the open and close points of the trading day. However, the shading is important to take note of for trend purposes: the real body will be black on those days when the stock or currency closes lower than at its open value, and white on days when the close is higher.
When you take a group of candlesticks showing prior trend, real body and other indicators, each with an associated previous trend (showing a history of the value increasing or decreasing), the pattern -- whether it be one of reversal or of continuation -- over the short-term should become apparent. Reversal, by the way, is not necessarily negative: if a currency has been falling in value, but a reversal pattern is seen, that means simply that the opposite is expected now to occur. In other words, the currency is expected to increase in value.
Learn more about the candlestick pattern indicator at Interbank FX (http://www.ibfx.com/tools/cpr/default.aspx). Art Gib is a freelance writer.
Article Source: http://www.earticlesonline.com/Article/Candlestick-Pattern-Indicator---The-Psychology-Behind-the-Numbers/474461
