JAPANESE CANDLESTICKS

JAPANESE CANDLESTICK
BY ELEKOFEHINTI OLUSOLA

The Candlesticks techniques we use today originated in the style of technical charting used by the Japanese for over 100 years before the West developed the bar and point and figure systems. In the 1700s a Japanese man named Homma, a trader in the futures market, discovered that, although there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of the traders. He understood that when emotions played into the equation a vast difference between the value and the price of rice occurred. This difference between the value and the price is as applicable to stocks today as it was to rice in Japan centuries ago. The principles established by Homma are the basis for the candlestick chart analysis, which is used to measure market emotions towards a stock.

Candlesticks Components

When first looking at a candlestick chart, the student of the more common bar charts may be confused; however, just like a bar chart, the daily candlestick line contains the market's open, high, low and close of a specific day. Now this is where the system takes on a whole new look: the candlestick has a wide part, which is called the "real body". This real body represents the range between the open and close of that day's trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the opposite: the close was higher than the open. Just above and below the real body are the "shadows". Chartists have always thought of these as the wicks of the candle, and it is the shadows that show the high and low prices of that day's trading. If the upper shadow on the filled-in body is short, it indicates that the open that day was closer to the high of the day. And a short upper shadow on a white or unfilled body dictates that the close was near the high. The relationship between the day's open, high, low, and close determine the look of the daily candlestick. Real bodies can be either long or short and either black or white. Shadows can also be either long or short. Comparing Candlestick to Bar ChartsA big difference between the bar charts common in North America and the Japanese candlestick line is the relationship between opening and closing prices. We place more emphasis on the progression of today's closing price from yesterday's close. In Japan, chartists are more interested in the relationship between the closing price and the opening price of the same trading day. In the two charts below we are showing the exact same daily charts of USDCAD to illustrate the difference between the bar chart and the candlestick chart. In both charts you can see the overall trend of the stock price; however, you can see how much easier looking at the change in body color of the candlestick chart is for interpreting the day-to-day sentiment.

Basic Candlestick PatternsIn the chart below USDCAD 15 minutes, you see the 'long black body', or 'long black line'. The long black line represents a bullish period in the marketplace. During the trading session, the price of the currency was up and down in a wide range and it opened near the low and closed near the high of the day.By representing a bearish period, the 'long white body', or 'long white line'-(in the USDCAD chart below, the white is actually gray because of the white background) is the exact opposite of the long black line. Prices were all over the map during the day, but the currency opened near the high of the day and closed near the low.'Spinning tops' are very small bodies and can be either black or white. This pattern shows a very tight trading range between the open and the close, and it is considered somewhat neutral. The pattern indicates that there is indecision between buyers and sellers.'Doji lines' illustrate periods in which the opening and closing prices for the period are very close or exactly the same. You will also notice that, when you start to look deep into candlestick patterns, the length of the shadows can vary. Doji suggest indecision in the market sentiment. The battle between buyers and sellers is nil.

Watch out for the concluding part of this article in the next post

To your success
Elekofehinti Olusola