This particular chart type dates back to the 1700s in Japan. Munehisa Homma, a Japanese businessman, used the candlestick charts to track the price of rice. This method gave him an edge in his sector because he can map periods of fear and greed in the rice market.
Single candlesticks, according to their shape and size, can have “nicknames.” Most of these names came back from the Homma’s era in their original Japanese, and many others have been translated into English.
The candlestick pattern chart has been brought to the West by Steve Nison in 1989. This chart pattern replaced, in many cases, the bar pattern chart that was used in the West until that time.
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Every trade concerning an asset is been grouped into a timeframe. If we look at the monthly timeframe then we need to understand that a single candlestick includes all the transactions that happened inside this timeframe.
No timeframe is better than the other, it simply contains more or less information than the other. The bigger the timeframe (months, weeks, days, etc.), the less the noise in the chart. The smaller the timeframe (five minutes chart, ten minutes chart, etc.), the more the noise. On the other hand, the bigger the timeframe, the lesser the trading opportunities. The opposite is true for the smaller timeframes.
- Less Noise
- Less Trading Opportunities
- Less Volatility
- Shows the Bigger Picture
- More Noise
- More Trading Opportunities
- More Volatility
- Shows the Details
Most of the time, when we refer to the candlestick chart, we refer to the OHLC candles. This simply means that the candles include the open, high, low, and close prices. Many advanced charting software programs include more choices than this.
The body of a bullish candle, which usually is green, includes the opening price on the lower side and the close price on its upper side. The upper line of a candlestick is either called ‘shadow’ or ‘wick,’ and it represents the highest value that the price has taken. The lower wick represents the lower price that the asset has taken.
The red or bearish candle represents the same information with the difference that the upper side of its body represents the opening value and the lower side shows the closing price.
The red and green colors are the most popular choices. Other choices include black and white or hollow bodies with other color choices. The colors are mostly a cultural thing. In the West, the red color symbolizes danger, that’s why we use it to represent the downwards movement or the price. In China, red symbolizes luck and positiveness, that’s why they use this color for the upward price candle.
In the picture below, you can see an example of the perfect Doji candle. The Doji simply means that bears and bulls fought, but there was no winner. After the opening, going higher and lower, and closing, the price remained the same. We usually use the yellow color to represent this candle.