A Japanese candlestick chart is a form of bar-chart used to plot price movements of a derivative, security, or currency over time.
Candlestick charts are believed to have been developed in the 18thcentury by Munehisa Homma, Japanese rice trader in the futures market.
In Homma’s book “The Fountain of Gold – The Three Monkey Record of Money”, which he wrote in 1755, he claims that the psychological aspect of the market crucial to trading success and that traders’ emotions can significantly influence on rice prices. In his book, he observes that this fact can be used to position oneself against the market when all are bearish, because at that specific time there is a likelihood that prices will rise (and vice versa).
Candlesticks are composed of the Real Body, which is black or white and represents the area between the open and the close, and an upper and a lower shadow (“wick” or “tail”) which illustrate price excursions above and below the real body.
The wick illustrates the highest and lowest traded prices of a security during the represented timeframe. The body shows the opening and closing trade prices. If the security closed higher than it opened, the body is white or unfilled, with the opening price at the bottom of the body and the closing price at the top. If the security closed lower than it opened, the body is black, with the opening price at the top and the closing price at the bottom.
Modern candlestick charts often replace the black or white of the candlestick body with colors such as red (for a lower closing) and blue or green (for a higher closing). In some East Asian countries such as Taiwan, China, Japan, and South Korea, the coloring scheme is reversed (red for higher closing, and green/blue for a lower closing).
A candlestick portrays the battle between Bulls (buyers) and Bears (sellers) over a given period of time.
In general, the longer the body is, the buying or selling pressure is more extreme. The longer the white candlestick is the close is further above the open. This suggests that buyers were aggressive and prices increased significantly from the opening price to the closing price.
On the other hand, short candlestick body shows less price movement and represents price consolidation. The longer the black candlestick is the close is further below the open. This suggests that sellers were aggressive and prices decreased significantly from the opening price to the closing price.
Marubozu candlesticks are candlesticks that do not have upper or lower shadows and the high and low are exactly the open or close. The name is derived from “close-cropped” or “close-cut” in Japanese. A White Marubozu indicates that buyers controlled the price action from the first trade to the last trade and is considered bullish. A Black Marubozu indicates that sellers controlled the price action from the first trade to the last trade and is considered bearish.
The upper and lower candlesticks shadows provide information about the trading session high and low.
The upper wick indicates the session high and the lower wick indicates the session low. Candlesticks with short wicks indicate that most of the trading action was close to near the open and close. Candlesticks with long wicks show that prices extended well beyond the open and close.
Candlesticks with a long upper wick and short lower wick indicate that buyers dominated during the session, and bid prices higher. However afterwards sellers forced prices down, and the weak close created a long upper shadow. On the other hand, candlesticks with long lower wicks and short upper wicks indicate that sellers dominated during the session and drove prices lower. However, buyers later bid prices higher close to the end of the session and the strong close created a long lower wick.
Spinning Tops are candlesticks that have small bodies with upper and lower shadows that are longer than the length of the body. Spinning tops signal market uncertainty. The small Real Body shows little movement from open to close, and the long shadows indicate that both bulls and bears were active during the session.
Doji Candlesticks are formed when a security’s open and close are virtually equal. Doji represents a sense of uncertainty or tug of war between buyers and sellers. Prices move above and below the opening level during the trading session, however close at or close to the opening level. This results in a standoff between bulls and bears.
Candlesticks do not show the sequence of events between the open and close. The high and the low are plotted, however candlesticks and bar charts do not show us which came first.
Written by: Trading Growth
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