Candlestick chart

Scheme of a single candlestick chart. The Low and High caps are usually not present but may be added to ease reading.

A candlestick chart (also called Japanese candlestick chart) is a style of financial chart used to describe price movements of a security, derivative, or currency. Each "candlestick" typically shows one day, thus a one-month chart may show the 20 trading days as 20 "candlesticks".[1] Shorter intervals than one day are common on computer charts, longer are possible.

It is like a combination of line-chart and a bar-chart: each bar represents all four important pieces of information for that day: The open, the close, the high and the low. Being densely packed with information, they tend to represent trading patterns over short periods of time, often a few days or a few trading sessions.[2]

Candlestick charts are most often used in technical analysis of equity and currency price patterns. They are visually similar to box plots, though box plots show different information.

History

Candlestick charts are thought to have been developed in the 18th century by Munehisa Homma, a Japanese rice trader of financial instruments.[3] They were introduced to the Western world by Steve Nison in his book, Japanese Candlestick Charting Techniques. They are often used today in stock analysis along with other analytical tools such as Fibonacci analysis (Fibonacci retracement). [4]

In Beyond Candlesticks,[5] Nison says, "However, based on my research, it is unlikely that Homma used candle charts. As will be seen later, when I discuss the evolution of the candle charts, it was more likely that candle charts were developed in the early part of the Meiji period in Japan (in the late 1800s)."

Description

Candlesticks are usually composed of the body (black / white or green / red), and an upper and a lower shadow (wick). The area between the open and the close is called the real body, price excursions above and below the real body are shadows. The wick illustrates the highest and lowest traded prices of a security during the time interval represented. The body illustrates the opening and closing trades.

If the security closed higher than it opened, the body is hollow 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 solid or filled, with the opening price at the top and the closing price at the bottom. A black (or red) candle represents a price action with a lower closing price than the prior candle's close. A white (or green) candle represents a higher closing price than the prior candle's close. Thus, the color of the candle represents the price movement relative to the prior period's close and the "fill" (solid or hollow) of the candle represents the price direction of the period in isolation (solid for a higher open and lower close; hollow for a lower open and a higher close). A candlestick need not have either a body or a wick.[6]

In trading, the trend of the candlestick chart is critical and often shown with colors.

To better highlight price movements, modern candlestick charts (especially those displayed digitally) 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).

Candlestick patterns

In addition to the rather simple patterns depicted in the section above, there are more complex and difficult patterns which have been identified since the charting method's inception. Complex patterns can be colored or highlighted for better visualization.

Rather than using the open-high-low-close for a given time period (for example, 5 minute, 1 hour, 1 day, 1 month, 1 year), candlesticks can also be constructed using the open-high-low-close of a specified volume range (for example, 1,000; 100,000; 1 million shares per candlestick).

Generally, the longer the body of the candle, the more intense the trading. A hollow body signifies that the stock closed higher than its opening value. A filled body signifies the opposite.

Usage

Candlestick charts are a visual aid for decision making in stock, foreign exchange, commodity, and option trading. For example, when the bar is white and high relative to other time periods, it means buyers are very bullish. The opposite is true for a black bar. Candlestick charts serve as a cornerstone of technical analysis. The main usage of a candlestick patterns is to identify trends. Looking at a candlestick, one can identify an asset’s opening and closing prices, highs and lows, and overall range for a specific time frame.[7]

Heikin-Ashi candlesticks

Heikin-Ashi (平均足, Japanese for 'average bar') candlesticks are a weighted version of candlesticks calculated with the following formula:[8]

  • Close = (open + high + low + close) / 4
  • High = maximum of high, open, or close (whichever is highest)
  • Low = minimum of low, open, or close (whichever is lowest)
  • Open = (open of previous bar + close of previous bar) / 2

Heikin-Ashi candlesticks must be used with caution with regards to the price, since the body does not necessarily sync up with the actual open/close. Unlike with regular candlesticks, a long wick shows more strength, whereas the same period on a standard chart might show a long body with little or no wick. Depending on the software or user preference, Heikin-Ashi may be used to chart the price (instead of line, bar, or candlestick), as an indicator overlaid on a regular chart, or as an indicator plotted on a separate window.

Relationship to box plots

Candlestick chart are similar to box plots. Both show maximum and minimum values. The difference between them is in the information conveyed by the box in between the max and min values. The top and bottom edges of the box in the box plot show the 75th and 25th percentile values respectively. The bar inside the box in the box plot shows the 50th percentile. The top and bottom edges of the box in the candlestick chart show the initial value and the final value, with the color of the box showing whether the initial value is higher or lower than the final value.

See also

References

  1. ↑ "Stock Analysis - an introduction to candlesticks". Stoickcharts. Retrieved 24 October 2016.
  2. ↑ "Understanding Japanese Candlestick Charts". Investopedia. Retrieved 24 October 2016.
  3. ↑ Candlestick Charting Explained: Timeless Techniques for Trading Stocks and Futures, Gregory L. Morris, McGraw-Hill, 2006, ISBN 0-07-146154-X / 9780071461542
  4. ↑ Nison, Steve, Japanese Candlestick Charting Techniques, Second Edition. ISBN 978-0-7352-0181-1
  5. ↑ Nison, Steve, Beyond Candlesticks: New Japanese Charting Techniques Revealed, ISBN 978-0-471-00720-3
  6. ↑ Nison, Steve (2001). Japanese candlesticks charting techniques (2nd edn. ed.). 0735201811. |access-date= requires |url= (help)
  7. ↑ Lu, Tsung-Hsun; Shiu, Yung-Ming; Liu, Tsung-Chi (2012-04-01). "Profitable candlestick trading strategies—The evidence from a new perspective". Review of Financial Economics. 21 (2): 63–68. doi:10.1016/j.rfe.2012.02.001.
  8. ↑ Kuepper, Justin. "Heikin-Ashi: A Better Candlestick". Investopedia. Retrieved 28 June 2015.
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