3.18 Japanese Candlestick Charts
Candlesticks are a form of charting developed by the Japanese rice traders in the 17th century. A legendary rice trader known as Homma is credited with the development and use of this form of charting. Later, it was introduced to the Western world through the efforts of Steve Nison.
The concept is best understood with the illustration below.
Each candlestick represents a data set of the complete price action during a selected time frame. The time frame could be anything from a few minutes to a month. In the diagram above you can see a green candle and a red one, both having wicks at either end. Actually the main body of the candle (the green or red solid areas) represents the relationship between the open and close prices of the period. The upper wick in each case represents the high and the lower wick represents the low price of the period.
If the close price is higher than the open, the body of the candle is usually green. Please note that depending on the color settings of your trading platform it could be white also. If the close is lower than the open, the body is usually colored red but again if the previous one is white then it would be black. The thin lines, the ‘wicks’, are drawn to represent the high-low trading range for the period.
Compared to the traditional bar charts, Japanese candlestick charts give a very visual and instant picture of how the prices moved during the period. They are particularly useful in representing the relationship between the opening price and the close price.
- Candlestick Charts - An Introduction