By Yeo Yong Kiat in Finanalytics
Candlestick charts actually had their origin in Japan in the 1700s. Munehisa Honma, a Japanese rice trader, is considered to be the father of candlestick charts. He was based in Osaka during the Tokugawa Era, and developed a way to identify repeating patterns in the pricing of rice commodities. Simply put, he found that although there was a link between price and the supply & demand of rice, the market price was heavily dependent on the emotions of traders as well.
(Author's Note: I decided to write this article also to practise my HTML & CSS skills. All diagrams were drawn in HTML & CSS, so you'll realise you can't quite right-click on them and save them as diagrams.)
A candlestick refers to a diagrammatic element devised by Homma to clearly display multiple data points of a trading commodity. In today's stock market terms, these data points refer to the open, high, low and closing price of an asset:
With reference to the diagram above, a candlestick has 3 key portions:
Candlesticks are one of the languages of technical analysis, and give the trader some sense of understanding of present market sentiments. Whether or not a trend persists depends on current circumstances, and thus the trader should not take candlesticks to be a firm prediction of the future. Often, we use candlesticks to determine whether we should cut our losing trades short, letting our winning trades run, and deciding on short-term entry/exit points. Therefore, candlesticks and their patterns must be read in the context of the entire price chart - one should combine them with other technical analysis indicators as well.
The candlesticks shown above are what we call "neutral" candlesticks (i.e. a candlestick with no particular indication of market sentiment by itself). Some special candlesticks contain more information about market sentiment, and should be memorised by the aspiring trader. More often, these candlesticks form components in more complex candlestick patterns.
Up Spinning Top
Down Spinning Top
As you can see, single candlesticks by themselves are not very useful. Regardless, the aspiring trader should still familiarise themselves with them because they are important components of more complex candlestick patterns - it is the language of the trader after all. At the very least, candlesticks are more useful than a simple line graph because the four data points give us some sense of whether buyers or sellers were pushing the day.
Think about it, how long is long, and how short is short?
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