Candlestick charts are one of the oldest types of charts which are used for predicting prices. They try to trace back to the 1700s, where candlestick charts were used to predict the price of rice. Munehisa Homma became famous at the time for using these charts and his form of candlestick analysis helped him achieve over a 100 consecutive winning trades.
The Rise of Candlestick Charting Techniques in the West
Until the 1980s candlestick charting was not well known in the West and very few people had even heard of this method of charting. This all changed with a couple of books that were published. The first was “The Japanese Chart of Charts” by Seiki Shimizu which gained cult status with many savvy traders but the book which really launched candlestick charting to a wider audience was - “Japanese Candlestick Charting Techniques” By Steve Nison which was written in an easy to read style and soon became an investment classic.
The Difference Between Candlestick Charts and Bar Charts
Candlestick chart show the same information as a bar chart however, in candlestick charting, the larger block (or body) in the middle shows the range between the opening and closing prices. If the block in the middle is filled or coloured in (normally in black), then the currency closed lower than it opened and if it remains uncoloured (white) the currency closed higher than it opened. The colour of the candle gives you an instant view of the bullishness or bearishness of the market.
So let's look at the terms used and how to create the chart. The hollow or filled portion of the candlestick is called "the body" and The thin lines above and below the body represent the high/low range and are referred to as the "shadows,"wicks or "tails". The high is indicated by the top of the upper shadow and the low by the bottom of the lower shadow.
If the currency studied closes higher than the opening price, a hollow candlestick is drawn with the bottom of the body representing the opening price and the top of the body representing the closing price so the candle is white. If the currency closes lower than the opening price, a filled candlestick is evident (coloured black) with the top of the body, representing the opening price and the bottom of the body representing the closing price of the currency.
So now we know how to draw a candlestick chart, lets take a look at the advantages of using them in your trading strategy.
The Advantages of Using Candlestick Charts
The same information appears on an a Candlestick chart as on a bar chart but the Candlestick chart, offers a more visual view of the price action and this gives the trader several advantages:
Candlesticks offer the additional visual of the candlestick body, means you get an extra tool with which to see the bullish or bearish trader psychology.
As the candlestick chart is a more visual tool than a bar chart, our eyes adapt almost immediately to the information and we learn and remember the different formations easily.
Candlesticks and candlestick patterns have great names which are easy to remember and therefore help you see potential profitable trading scenarios quickly. The names are memorable and fun to use and here are some examples - Hanging Man, hammers, Dark Cloud Cover or a Dragon Fly Doji
Candlestick chart patterns are extremely useful for warning of important market tops or bottoms and can give you a better indication of a possible trend reversal than a normal bar chart.
Candlestick Charting Strategies
Candlestick charts are fun to use and can be very profitable but of course the way you use them in your currency trading strategy is the key to your success with them. As always, its your skill and judgement which are needed to realise the profit potential of any candlestick charting strategy.