In the 1700s a Japanese man named Homma, a trader in the futures market, developed a method of technical analysis to analyze the price of rice contracts known as candlestick charting. Candlestick charts display the high, low, open, and close for a commodity each day over a specified period of time, in a format similar to a bar chart, but in a manner that maximizes the relationship between the opening and closing prices.
A narrow line shows the day's price range. A wider body marks the area between the open and the close, referred to as real body. If the close is above the open, the body is white or green (not filled); if the close is below the open, the body is black or red (filled). Steve Nison is normally credited with popularizing candlestick charting in the west and is recognized as a leading expert on how a trader might interpret the readings.
Candlesticks provide specific visual cues that make understanding price movement easier. Trading with Japanese Candle Charts allow speculators to better comprehend market feelings. Offering a wider range of information than traditional bar charts candlesticks give emphasis to the relationship between close price and open price.
Traders who use candlesticks are likely to more quickly identify different types of price action that tend to predict reversals or continuations in trends. Furthermore, combined with other technical analysis tools, candlestick pattern analysis can be a very useful way to select entry and exit points.
Candlestick charts are much more appealing and understandable than a standard two-dimensional bar chart. There are four elements necessary to construct a candlestick chart, the OPEN, HIGH, LOW and CLOSING price for a given time period.
There are multiple forms of candlestick chart patterns:
White candlestick - signals uptrend movement
Black candlestick - signals downtrend movement
Long lower shadow - bullish signal
Long upper shadow - bearish signal
Hammer - a bullish pattern during a downtrend; Shaven head - a bullish pattern during a downtrend;
Hanging man - bearish pattern during an uptrend
Inverted hammer - signals bottom reversal, however confirmation must be obtained from next trade;
Shaven bottom - signaling bottom reversal, however confirmation must be obtained from next trade;
Shooting star - a bearish pattern during an uptrend
Spinning top white - neutral pattern, meaningful in combination with other candlestick patterns
Spinning top black - neutral pattern, meaningful in combination with other candlestick patterns
Doji - neutral pattern, meaningful in combination with other candlestick patterns
Long legged doji - signals a top reversal
Dragonfly doji - signals trend reversal
Gravestone doji - signals trend reversal
Marubozu white - dominant bullish trades, continued bullish trend
Marubozu black - dominant bearish trades, continued bearish trend
Candlestick charts are a visual aid for decision making in stock, forex, commodity, and options trading.
This is a very simplified primer on Japanese Candlesticks.
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