Candlestick charting has become popular in the last two decades among the traders. Candlestick charts are able to present much more information as compared to the other charts. With a quick glance on the candlestick chart, you get the visual representation of the battle being waged in the bulls and the bears for the control of the market. However, you need to understand the limitations of these charts so as not to get misled by it. For example, on very short time frames that are used by scalpers and other day traders, the patterns that emerge on these charts may not be a valid trading signal.
In the last decade electronic trading has become highly popular. What this means is that significant volume of the trading takes place outside of the regular market hours. This trading can cause patterns that don't reflect the full picture to appear on a candlestick chart.
Let's make this clear with a practical example. Let's talk of a stock ABC that is being traded on the floor of New York Stock Exchange (NYSE). Regular trading on NYSE starts at 9:30 AM EST each business day. It closes at 4:30 PM EST. After that these stocks keep on trading electronically. Now, suppose the stock ABC had been trading at $59 15 minutes before the official open of NYSE. When the NYSE opens, the stock ABC open price is $60 per share. This $60 per share open price may not be an accurate reflection of the stock open price as the stock ABC has been trading as low as $59 in the pre market hours!
This makes the opening price of $60 per share recorded on the candlestick chart has quite inaccurate. Let's suppose further that stock ABC never trades down to $59 per share throughout the regular trading hours. This makes the low price of the candlestick chart also inaccurate.
So candlestick charts on very short time frame may not be able to produce accurate trading signals. Couple this with the fact that most of the trading now also takes place on the electronic networks makes them somewhat inaccurate sometimes. These are the two risks or what you may call limitations that you need to keep in your mind.
Apart from that candlestick chart is a powerful tool in the hands of an experienced trader. When an experienced trader combines these charts with technical indicators, this combination can produce highly accurate trading signals.
There are many candlestick patterns that can be used to produce buy and sell signals. Some of these candlestick patterns are simple while others are complex. Single stick candlestick patterns can be easily spotted while double stick and three stick candlestick patterns can take two to three days to develop. Mastering these candlestick patterns is what you need to do as a serious trader.
Now Yahoo Finance is an excellent free resource that you can use to create candlestick charts for any stock by just entering the stock ticker symbol. You should play around with the options available for Yahoo Finance. This will help you to learn a lot of new things about candlestick charts.
Author Resource:-
Mr. Ahmad Hassam has done Masters from Harvard. Master these Candlestick Patterns. Get this 1 Minute Forex Trading System that makes money anytime FREE!
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