Japanese Candlestick Charts: In Introduction

Japanese Candlestick Charts (often referred to as candlestick or candle charts) is a Japanese charting method that compares to the western bar chart. The candlestick charting method has only recently gained popularity in the west since its introduction in the 18th century, making it one of the oldest types of charting.

FEATURES AND CONSTRUCTION

Candle charts provide added detail compared to your standard line charts. This is because candle charts not only show the final closing price, but also the open, high and low. By this description, both bar and candle charts are exactly the same.

However, the single most distinct feature which makes candle charts stand out is something called a real body. The real body is the area between the open the close. On electronic charts this is shown by drawing a rectangle (or square) between the open and close. This feature provides greater understanding of market psychology.

Another feature is the range. The range is the distance between the high and low of the trading session and allows you to measure volatility.

Furthermore, upper and lower shadows (or wicks and tails) are the distance between either the open/close and the high/low. This is dependent on the trading session. Shadows are a really useful feature that can aid you in determining the underlying psychology of the market.

As you can see from the above images, the real body is also coloured. Traditionally, black and white colours were used but given todays advanced charting platforms, individuals like to choose their own colours. Green and red are common choices with green denoting a positive session, and red, a negative session.

If you enjoy the classic black/white charting, then white would represent positive day, and black, a negative day.

PSYCHOLOGY INTERPRETATION

The first image also shows the psychology of the market. The first candle traded above and below its open before closing below the midpoint of the sessions range. What this tells us is even though buyers are in control, sellers have a sound backing and are threatening bulls. This specific candle is called a hammer candle.

The second candle has a larger range and body compared to the first. It also opened below the prior close. Something to also note is the long upper shadow. This suggests buyers pushed the market higher only to meet determined sellers, who seized control and consequently pushed prices lower.

Sometimes a particular trading session may not have a wick. This is a strong sign that sentiment is one sided. The below image shows how price only traded beneath the open, indicating a strongly negatively biased market. Sellers didn’t allow buyer to push prices higher.

CANDLE CHARTS VS LINE AND BAR CHARTS

Against the line chart, one can notice the additional detail candle charts provide. Not only can we see trends, but we can also instantly see who is in control – the bulls or the bears. In addition, we can see the influence these participants have on price action.

Against its western counterpart, candlesticks provide a greater understanding into the conviction of market participants. Both charting types provide information of who is in control, but candle charts offer another dimension into market sentiment and bias.

Overall, Japanese candlesticks provide the individual with knowledge of market behaviour, market strength and an understanding of price trends. Here are a few advantages and disadvantages:

ADVANTAGES

DISADVANTAGES

There are more advantages to candle charts through windows and patterns, which may be discussed in the future.

 

© Akif SH. Din, AGORA-direct Limited, 03/12/2018

 

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