History of the Japanese Candlestick
Before we begin, it is crucial to grasp a basic understanding of the background of Japanese Candlesticks. As suggested by their name, these originated from Japan and have been used since the 18th century. The very first person to use them was Homma Munehisa, a rice merchant from the country.
The candlestick is an ancient form of price analysis in Japan, and can be attributed to Steve Nison as its discoverer. Around the 1980s, he made this methodology available to traders worldwide. To this day, his groundbreaking book “Japanese Candlestick Charting Techniques” remains a popular resource among those who use it.
The candlesticks pattern still holds onto its Japanese names, providing a far-eastern flavour to technical analysis.
In a bar chart, open and close prices are indicated by a tick on the left and right sides of the bar. With candlesticks, these prices are represented in a rectangular body.
In a candlestick chart, there are two types of candles – bullish, usually represented by blue/green/white and bearish, usually red/black. The software offers the option to personalise the colours; this module has gone for the blue and red combination to show bullish and bearish candles, respectively.
Let us consider the bullish candle. It is composed of 3 elements, similar to a bar chart.
The Central real body – The real body, rectangular, connects the opening and closing price.
Upper shadow – Connects the high point to the close.
Lower Shadow – Connects the low point to the open.
Take a glance at the figure below to comprehend how a bullish candle is formed.
To understand this better, let’s use an example and assume the prices are as follows.
Open = 62
High = 70
Low = 58
Close = 67
Similarly, the bearish candle also has three parts:
This is how a bearish candle would look like:
Once you understand the display format of a candlestick, it is much simpler to interpret patterns.
A candlestick chart is a type of graph that reveals the price movements on a certain timeframe. The blue candle indicates an uptrend while the red one represents a bearish trend.
Also, remember that a candle with a long body reflects heavy buying or selling activity, in contrast to a candle with a short body, indicating weaker trading and therefore less price change.
In conclusion, candlesticks are easier to interpret than bar charts. They facilitate a fast overview of the open and close prices in relation to the highest and lowest values.