A Candlestick Chart
The basis of the candlestick is said to have originated around the 17th century in Japan.
The Japanese used this style of charting (technical analysis) to predict rice prices.
A legendary rice trader named Homma from the town of Sakata is said to have made a huge fortune using candlestick analysis.
Over the years candlestick charting has been modified and refined and Steve Nison is credited with popularizing the style of candlestick charting that is used today.
The Japanese Candlestick
Since the candlestick shows you the same price information as the bar chart then you may be wondering why to even use them. One reason to use the candlestick is because it gives you a better pictorial representation of the price action.
The box, or rectangular portion, of the candle provides unique visual clues that make reading price action easier. These visual clues make them more appealing than the standard two-dimensional bar chart.
Below are examples of candlesticks with explanations for each candlestick component.
**In each picture I have also included a bar so that you can see its equivalent and compare the differences.**
The Stock Closes Higher for the Day
**We will refer to the candlestick as if we are talking about a daily stock chart.**
The picture below right is an example of what a bar and candle look like if the price of the stock closes higher than it did the previous day. There was a lot of buying pressure so the stock closed higher for the day.
The box, or rectangular portion, of the candle is called the body (also referred to as "the real body"). This represents the price range between the open and close for the day.
The tips of the thin lines above and below the body are called shadows (also referred to as "wicks" and "tails) and represent the stock’s "high" and "low" price for the day.
When the stock closes higher for the day the body (rectangular part) of the candle will be white or green.
The bottom part of the body represents the opening price for the day, and the top part of the body represents the closing price for the day.
If you recall from the bar chart lesson the horizontal line extending to the right of the bar represents the closing price of the day. If the horizontal line on the right is higher than the horizontal line on the left then you can easily see that the stock closed higher than it opened for that time period.
The problem that arises is that when you have several bars on a chart it becomes harder to see each individual bar. The candlestick chart alleviates this problem because the "body" of the candle is easier to see.
The Stock Closes Lower for the Day
If the stock closes lower than it opened then the body of the candle will be black or red. This time the opening price is at the top of the body and the closing price at the bottom.
When the stock closes "higher" for the day, the candlestick will be "white or green", and when the stock closes "lower" for the day, the candlestick will be "black or red".
Here are how the candlesticks look on a stock chart.
I hope this lesson has helped you to at least understand the basic mechanics of a candlestick chart. There is a lot more to learn about candlestick charting.
There are at least 12 major names for the different shapes of the "body" and "shadows". Names such as Doji. Graveyard Doji, Shooting Stars, Hammer, Hanging Man, etc. Learning about candlestick charting is a course all on its own.
But don't let that deter you. The traders I know that use candlesticks are extremely passionate about what they do and they swear they will never go back to the bar chart again.
I think part of the reason I stick with bar charts is because they are easier for me. It's what I learned how to trade off of and it works for me. I guess it's like the saying, "you can't teach an old dog new tricks".
Ultimately find what works for you!
If you're ready for the next lesson then proceed to Lesson 5: Trendlines.
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