While
we briefly covered candlestick charts in the previous lesson, we’ll now dig in
a little and discuss them more in detail. First let’s do a quick review.
What is a Candlestick?
Back
in the day when Godzilla was still a cute little lizard, the Japanese created
their own old school version of technical analysis to trade rice. A westerner
by the name of Steve Nison “discovered” this secret
technique on how to read charts from a fellow Japanese broker and Japanese
candlesticks lived happily ever after. Steve researched, studied, lived,
breathed, ate candlesticks, began writing about i
t and slowly grew in
popularity in 90s. To make a long story short, without Steve Nison, candle
charts might have remained a buried secret. Steve Nison is Mr. Candlestick.
Okay
so what the heck are candlesticks?
The
best way to explain is by using a picture:
Candlesticks
are formed using the open, high, low and close.
·
If
the close is above the open, then a hollow candlestick (usually displayed as
white) is drawn.
·
If
the close is below the open, then a filled candlestick (usually displayed as
black) is drawn.
·
The
hollow or filled section of the candlestick is called the “real body” or body.
·
The
thin lines poking above and below the body display the high/low range and are
called shadows.
·
The
top of the upper shadow is the “high”.
·
The
bottom of the lower shadow is the “low”.
Support and Resistance
Support
and resistance is one of the most widely used concepts in trading. Strangely
enough, everyone seems to have their own idea on how you should measure support
and resistance.
Let’s
just take a look at the basics first.
Look
at the diagram above. As you can see, this zigzag pattern is making its way up
(bull market). When the market moves up and then pulls back, the highest point
reached before it pulled back is now resistance.
As the
market continues up again, the lowest point reached before it started back is
now support. In this way resistance and support are continually formed as the
market oscillates over time. The reverse of course is true of the downtrend.