Candlestick Charts Explained
You may be asking yourself, "If I can already use bar charts to view
prices, then why do
I need another type of chart?"
The answer to this question may not seem obvious, but after going
through the following candlestick chart explanations and examples, you
will surely see value in the different perspective candlesticks bring to
the table. In my opinion, they are much more visually appealing, and
convey the price information in a quicker, easier manner.
What is the History of Candlestick Charts?
Candlestick charts are on record as being the oldest type of charts used
for price
prediction. They date back to the 1700's, when they were used
for predicting rice prices.
In fact, during this era in Japan, Munehisa
Homma become a legendary rice trader and gained a huge fortune using
candlestick analysis. He is said to have executed over 100 consecutive
winning trades!
The candlesticks themselves and the formations they shape were give
colorful names
by the Japanese traders. Due in part to the military
environment of the Japanese feudal system during this era, candlestick
formations developed names such as "counter attack lines" and the
"advancing three soldiers". Just as skill, strategy, and psychology are
important in battle, so too are they important elements when in the
midst of trading battle.
What do Candlesticks Look Like?
Candlestick charts are much more visually appealing than a standard
two-dimensional bar chart. As in a standard bar chart, there are four
elements necessary to construct a candlestick chart, the OPEN, HIGH, LOW
and CLOSING price for a given time period. Below are examples of
candlesticks and a definition for each candlestick component:
The body of the candlestick is called the real body, and represents the
range between the open and closing prices.
A black or filled-in body represents that the close during that time
period was lower than the open, (normally considered bearish) and when
the body is open
or white, that means the close was higher than the open
(normally bullish).
The thin vertical line above and/or below the real body is called the
upper/lower shadow, representing the high/low price extremes for the
period.
Bar Compared to Candlestick Charts
Below is an example of the same price data conveyed in a standard bar
chart and a candlestick chart. Notice how the candlestick chart appears
3-dimensional, as price data almost jumps out at you.
(3a)
(3b)
The long, dark, filled-in real bodies represent a weak (bearish) close (
3a ), while a long open, light-colored real body represents a strong
(bullish) close ( 3b ). It is important to
note that Japanese
candlestick analysts traditionally view the open and closing prices as
the most critical of the day. At a glance, notice how much easier it is
with candlesticks
to determine if the closing price was higher or lower
than the opening price.
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