Friday, 22 November 2013

Tools for Trading successfully : Candlesticks

The term Technical analysis in Finance is primarily used in context to tools which are helpful in forecasting the future prices of a stock. These tools have been used by traders for hundreds of years and date back to the 17th and 18th century. So how can technical analysis be helpful to a current day novice trader? The answer lies in the power of these tools to predict patterns, and help avoid common mistakes and pitfalls, that starter traders so always commit.

Candlesticks are one of the easiest to follow and helpful tools that one can use in day to day trading. However they are more useful in context to day trading, and often do not provide enough support to forecast long term movements. However on days when news is against a stock, and you have discovered other trends that indicate that the stock might be going downhill in the near future, it is best to exit from your trade while making substantial profits. It is at these crucial moments that candlesticks can provide helpful exit points to make your sell. Candlesticks have coloured patterns to depict when the stock is bullish, and when the stock is bearish. However, in addition to these indications, candlesticks also have patterns like a an upper shadow or a lower shadow and of course the length of the candlestick itself which can suggest which direction the stock will most likely be taking in the next few minutes. For ex if you see the diagram below

A strong lower shadow in the shape of a hammer suggests that the stock is most likely to go down from this point. An exit at this point can be contemplated, based on a few other indications from some other very handy tools. Smart Trading often involves going to and forth between these indicators in a few seconds and make a decision to exit or stay in your trade. Don’t be jolted by the timeframe, once you get used to it, it is rather ok to use!

I will be providing further details on candlesticks and other frequently used Technical analysis tools in my future posts. Happy reading!