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Understanding Technical Analysis through Candlestick Pattern

There are broadly 2 types of analysis in the stock market: 
1. Technical Analysis

2. Fundamental Analysis

We are hereby going to discuss technical analysis in detail:

Technical Analysis:  It can be defined as assessing the stocks or investment opportunity on factors like the price of a stock, the volume of trading, high- low prices, and such short-term factors. Technical analysts are short-term traders and are hardly interested in knowing a company’s fundamentals. Although it is good to understand and analyze the fundamentals of companies and then make a prudent choice of the company you want to trade in. But generally speaking, such traders completely rely on market demand and supply factors to trade in various stocks.

In technical analysis generally, traders hold the following assumptions:

  •        The market tells everything: The market generally runs on a trend. If on a fine day stock price is fluctuating beyond normal, it might be an indicator that a high-profile investor is acting on some news. If it’s a good trend and depicts growth, one should buy the stock.
  • History repeats itself: The stock market can be compared to human psychology. So it will repeatedly tend to behave in the same way as in its past. For instance, if the stock market is showing an upward trend, then investors will enter into buying to be in alignment with the trend and vice versa.

Now, that we broadly know the assumptions in the stock market, let’s talk about how to analyze it through charts. The most popular and widely used chart is the candlestick chart. Let’s discuss that in detail.

Candlestick Chart


The candlestick chart is made of 3 components:

  •      Upper body: It depicts the high point the stock reached.
  •        Lower body: It depicts the low point the stock reached
  •      Central body: It depicts the open and close points of the stock.

Characteristics of Candlestick

So generally there can be bearish candles or bullish candles. Bearish candles are one when the closing price is less than the opening price. This represents that investors are bearish on stocks. And generally, investors sell their stock in such conditions.

Bullish candles are one when the opening price is more than the closing price. This represents that investors are bullish on the stock. And generally, investors tend to buy stocks in such conditions.

Bearish candles are generally represented in red and bullish candles in green. Although color coding may vary on the choice of trader. They may use some different colors also.

And also if you will analyze the charts closely you will notice that there are varied candles of short and long lengths. Short candles simply represent that stock is not getting traded much, and generally, such stocks should not be dealt with. Similarly, large candles represent that stocks are getting actively traded and such stock can be analyzed with much more dexterity.

Conclusion

There are various types of candlestick formations that enable an investor to devise a trading strategy for a particular stock. And by and large candlesticks formations are an effective tool to study stocks and to be able to trade wisely and prudently.

But remember if you are a long-term investor then you should never go long on any stock basis technical analysis.  For long-term investors, both fundamental and technical analysis is equally important. 

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