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Candlestick Charting-- Technical Analysis



Candlestick chart of EURUSD


A candlestick chart is a style of bar-chart used primarily to describe price movements of an equity over time.

It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity and currency price patterns. They appear superficially similar to error bars, but are unrelated.

History

Candlestick charts are said to have been developed in the 18th century by legendary Japanese rice trader Homma Munehisa. The charts gave Homma and others an overview of open, high, low, and close market prices over a certain period. This style of charting is very popular due to the level of ease in reading and understanding the graphs. Since the 17th century, there has been a lot of effort to relate chart patterns to the likely future behavior of a market. This method of charting prices proved to be particularly interesting, due to the ability to display five data points instead of one. The Japanese rice traders also found that the resulting charts would provide a fairly reliable tool to predict future demand.

Steve Nison's 1991 book, Japanese Candlestick Charting Techniques (ISBN 0-7352-0181-1), called back into traders' memory this particular form of charting, which had already been picked up by Charles Dow around 1900. Today it is one of the most commonly used chart displaying methods with traders.

Candlestick layout

Candlesticks are usually composed of the body (black or white), an upper and a lower shadow (wick). The wick illustrates the highest and lowest traded prices of a stock, and the body the opening and closing trades. If the stock went up, the body is white, with the opening price at the bottom of the body and the closing price at the top. If the stock went down, the body is black, with the opening price at the top and the closing price at the bottom. A candlestick need not have either a body or a wick.

Patterns

Simple Patterns

There are multiple forms of candlestick chart patterns, with the simplest depicted at right. Here is a quick overview of their names:

Basic Candlesticks
  1. White candlestick - signals uptrend movement (those occur in different lengths; the longer the body, the more significant the price increase)
  2. Black candlestick - signals downtrend movement (those occur in different lengths; the longer the body, the more significant the price decrease)
  3. Long lower shadow - bullish signal (the lower wick must be at least the body's size; the longer the lower wick, the more reliable the signal)
  4. Long upper shadow - bearish signal (the upper wick must be at least the body's size; the longer the upper wick, the more reliable the signal)
  5. Hammer - a bullish pattern during a downtrend (long lower wick and small or no body); Shaven head - a bullish pattern during a downtrend & a bearish pattern during an uptrend (no upper wick); Hanging man - bearish pattern during an uptrend (long lower wick, small or no body; wick has the multiple length of the body.
  6. Inverted hammer - signals bottom reversal, however confirmation must be obtained from next trade (may be either a white or black body); Shaven bottom - signaling bottom reversal, however confirmation must be obtained from next trade (no lower wick); Shooting star - a bearish pattern during an uptrend (small body, long upper wick, small or no lower wick)
  7. Spinning top white - neutral pattern, meaningful in combination with other candlestick patterns
  8. Spinning top black - neutral pattern, meaningful in combination with other candlestick patterns
  9. Doji - neutral pattern, meaningful in combination with other candlestick patterns
  10. Long legged doji - signals a top reversal
  11. Dragonfly doji - signals trend reversal (no upper wick, long lower wick)
  12. Gravestone doji - signals trend reversal (no lower wick, long upper wick)
  13. Marubozu white - dominant bullish trades, continued bullish trend (no upper, no lower wick)
  14. Marubozu black - dominant bearish trades, continued bearish trend (no upper, no lower wick)

Complex Patterns

Despite those rather simple patterns depicted in the section above, there are more complex and difficult patterns, which have been identified since the charting method's inception.

Candlestick charts also convey more information than other forms of charts, such as bar charts. Just as with bar charts, they display the absolute values of the open, high, low, and closing price for a given period. But, they also show how those prices are relative to the prior periods prices, so one can tell by looking at one bar if the price action is higher or lower than the prior one. That and they are visually easier to look at, and can be colorized for even better definition.

Use of candlestick charts

Itimoku Kinkô Hyô, the applied candlestick chart commonly used in Japan.

Candlestick charts are a visual aid for decision making in stock, forex, commodity, and options trading. For example, when the bar is white and high relative to other time periods, it means buyers are very bullish. The opposite is true for a black bar.

External links


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