Candlestick chart analysis is a technique that makes it easier to understand the dynamics of demand and supply in the market.
A Basic Introduction to Candlestick Chart Analysis
Charts provide a pictorial view of trading and the interaction between bulls and bears in the market.
What is chart analysis used for?
Using charting strategies and technical analysis helps traders to understand the market dynamics and position themselves for successful trading.
Chart analysis as a trading technique is useful in forecasting the results of any given trade over the short term or long term. A trader can use chart pattern analysis to interpret data on a daily, intraday, weekly or monthly basis.
Candlestick pattern analysis is an effective way of gauging market sentiments around a stock. This way, you as the traders would be in a position to make accurate forecasts about the possible direction the stock may take.
Underlying assumptions in chart and technical analysis
As you start using chart analysis as part of your binary options trading technique, it is important to be familiar with the two underlying assumptions:
1. Prices are always on a trend- Prices of assets can be on an upward or a downward trend. When prices are on an upward trend, it is an indication that bulls (or demand) are stronger. A downward trend is an indication that bears (or supply) are stronger.
2. Trends repeat themselves- Trends change and over a period of time, they form chart patterns. Patterns can be categorized as reversal patterns, which are an indication of a change in trend and continuation pattern, which are an indication that the previous pattern will resume after some time.
Support and resistance
Support and resistance are key aspects of chart analysis that every trader should understand. Support and resistance represent the main points at which demand and supply meet.
Support - This is the price point where demand is at its strongest to keep prices from falling further. In the financial markets, as prices fall toward the support level, assets become cheaper and buyers tend to buy while sellers are hesitant about selling. The assumption is that as prices reach the support, demand will be higher than supply and keep the prices from declining lower than the support point.
Resistance - This is the point at which supply is at its highest to keep prices from rising. As prices move towards the resistance level, sellers are more willing to sell and buyers are less willing to buy. As the prices reach the resistance, the assumption is that supply will be higher than demand, therefore keeping the price from going above the resistance level.
In the financial market, supply is equated to selling and bearish sentiments. On the other hand, demand is related to buying and bearish sentiments.
While charting is a helpful technical analysis strategy, it is important for a trader to read the data on each chart carefully. This is because candlestick patterns can be prone to misinterpretation or bias and you can arrive at the wrong conclusions, which can affect the results of your trade.