Last week in Part 3, we looked at line charts and bar charts. This week, we take charting a step further by looking at a concept introduced by the Japanese: Candlestick charts.
It is debatable who developed the candlestick concept. Many attribute Munehisa Homma, a Japanese rice trader, as the inventor of the candlestick charting approach. Others say it was more probable that candlestick charts arose from general trading activity and practices in the early part of the Meiji period in Japan (in the late 1800's) and the need to disseminate information. What can't be argued though, is that during this period, it was discovered that there was a relationship between price, traders' emotions and the supply and demand of rice. Adding in emotions to the equation added a whole new dimension to the analysis of the rice market. Traders, like Homma, appreciated that raw supply and demand factors weren't the only driving force behind the price of an asset and that human interaction had a big influence on the shape of the rice market at any given time.
Candlestick charting methods only really hit the Western world in the mid to late 20th century. As technology and computers also developed, it allowed this style of charting to spread more easily and become more widely understood. Candlestick charting is now globally used as a highly effective approach to analysing financial price data, for both the trader and investor in the short and longer term.
What is it?
A candlestick chart is simply a different style of chart used to interpret price movements of a given instrument. Each "candlestick" represents a period of time; whether that be 1 minute, 1 hour, 1 day or 1 week etc.
They are very similar to the bar chart, as each candle represents all four important pieces of information for that period: the open, the close, the high and the low. However, the way they are presented adds far more 'colour' around what is going on than the bar chart does, and because of this, I feel they can be interpreted much more easily.
The candlestick chart has two real goals:
1. Display price data in a more visual format to tell a story.
2. Identify candlesticks in combinations to confirm price trends and determine continuation or reversal.
The Candlestick versus the Bar Chart - how are they different?
The things that make candlesticks more useful than…
