A Brief History of Candlesticks and Candlestick Charts
Candlesticks and candlestick charts originated in Japan during the 18th century, this is why they are referred to as “Japanese candlestick charts” sometimes. Since no defined currency standard existed in Japan during this time, rice represented a medium of exchange. Various feudal lords deposited rice in warehouses in Osaka Japan and would then sell or trade the coupon receipts, thus rice become the first futures market. In the 1700s legendary Japanese rice trader Homma Munehisa studied all aspects of rice trading from the fundamentals to market psychology.
Homma subsequently dominated the Japanese rice markets and built a huge fortune. His trading techniques and principles eventually evolved into the candlestick methodology which was then used by Japanese technical analysts when the Japanese stock market began in the 1870s. The method of using candlesticks and candlestick charts was picked up by famed market technician Charles Dow around 1900 and candlestick charts remain arguably the most popular form of technical analysis chart in use by today’s traders and investors.
To learn more about candlestick charts and different candlestick patterns, checkout this lesson on Japanese candlestick patterns in forex trading.
What is a Candlestick?
- Candlesticks are formed using the open, high, low and close of the chart time frame we are using.
- If the close is above the open, then a hollow candlestick (usually displayed as white, green or blue) is drawn. This is referred to as a “bullish candle or bar”.
- If the close is below the open, then a filled candlestick (usually displayed as black or red) is drawn. This is referred to as a “bearish candle or bar”.
- The hollow or filled section of the candlestick is called the “real body” or body. Note: the color of the real body can vary between traders and depends on how they have the colors set / personal preference. Mine are always white for bullish and black for bearish, this is how yours need to be for purposes of our community.
- The thin lines poking above and below the body display the high/low range and are called shadows, tails or wicks…all three names apply to the same thing.
- The top of the upper shadow is the “high”.
- The bottom of the lower shadow is the “low”.
Long and Short Candles
- Long candle bodies show stronger buying or selling. A longer candle body shows more intense buy or sell pressure than a shorter body.
- Short bodies imply slower or less buying or selling.
- Candlestick that are long and white show strong buying interest. The larger the white candle, the further it closed above where it opened. This shows a considerable price increase from where price opened to where it closed. Long white candles show bulls were decisively in control!
- Conversely, long black candlesticks show selling interest was strong. The further price closed below where it opened, the longer the black candlestick body. This shows that prices lost significant ground and that sellers were clearly in control.
Candlestick Shadows (wicks or tails)
- The upper and lower tails or shadows on candlesticks give us important information about what took place during that bar’s trading session. You may also see these referred to as “wicks” or “tails”, these terms are synonymous with “shadows”.
- Upper shadows reflect the session high. Lower shadows reflect the session low.
- Candlesticks with long shadows show us that a reversal and rejection of that price area occurred.
- Candlesticks with short shadows show us little reversal or rejection occurred.
- A candlestick with a long upper shadow and little to now lower shadow indicates buyers or bulls lost control during the trading session and sellers pushed prices lower into the close. A long lower shadow but little to no upper shadow shows that sellers /ears lost control to buyers / bulls into the close.
- When you see a candlestick with a long shadow on one side of the bar, it’s an event to take note of. A long shadow signifies rejection of price and that a potential reversal is imminent, more on this later though.
What are Candlestick Charts?
Candlestick charts are simply price charts that consist of candlesticks instead of traditional price bars. Each candlestick shows the high, low, open and close for the period of time it reflects, this is the same information reflected in traditional price bars, but candlesticks make this information much easier to visualize and make use of.
What are the advantages of Candlestick Charts?
A candlestick chart is a visual display of many individual candlesticks that make up the price movement across a period of time for the particular currency pair or market being analyzed. The dramatic visual contrast from one candlestick to the next, enables traders to spot price action setups and visualize the differences in dynamics between price bars in a significantly easier and more enjoyable manner than using standard bar charts or line charts.
Most professional traders use candlestick charts these days, traditional bar charts are largely on their way out at this point. WE ONLY use candlestick charts here in the LTTTM community, please do not post anything but candlestick charts in the members’ forum (thank you!).
Line charts can be useful for certain things. They can give you a good quick and simple view of trend and support / resistance levels, but they aren’t really useful for trading or making trade decisions as they don’t provide us with any individual price action candle patterns or price dynamics.
In the image below, we can see a good example of the differences between candlestick, bar and line charts. Note how the candlestick chart shows a much more dynamic and impactful view of the price action on the chart…
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