Candlestick chart
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 fewtrading sessions.[2]
Candlestick charts are most often used in technical analysis of equity and currency price Scheme of a single candlestick
patterns. They are similar tobox plots. chart. The Low and High caps are
usually not present but may be
added to ease reading.
Contents
History
Description
Candlestick patterns
Usage
Heikin-Ashi candlesticks
Relationship to box plots
See also
References
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.
Fibonacci analysis (Fibonacci retracement). [4]
They are often used today in stock analysis along with other analytical tools such as
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]
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
In trading, the trend of the candlestick
charting method's inception. Complex patterns can be colored or highlighted for
chart is critical and often shown with
better visualization. colors.
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 oftechnical analysis. The main usage of a candlestick patterns is to identify trends. Looking
[7]
at a candlestick, one can identify an asset’s opening and closing prices, highs and lows, and overall range for a specific time frame.
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 indic
ator 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
Chart pattern
Hikkake pattern
Kagi chart
Open-high-low-close chart
Pivot point calculations
Spinning top (candlestick pattern)
References
1. "Stock Analysis - an introduction to candlesticks"(http://stockcharts.com/school/doku.php?id=chart_school:chart_an
alysis:introduction_to_candlesticks). Stoickcharts. Retrieved 24 October 2016.
2. "Understanding Japanese Candlestick Charts"(http://www.investopedia.com/articles/technical/02/121702.asp).
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 e
Tchniques Revealed, ISBN 978-0-471-00720-3
6. Nison, Steve (2001). Japanese candlesticks charting techniques(2nd edn. ed.). 0735201811.
7. Lu, Tsung-Hsun; Shiu, Yung-Ming; Liu, Tsung-Chi (2012-04-01). "Profitable candlestick trading strategies—The
evidence from a new perspective"(http://www.sciencedirect.com/science/article/pii/S1058330012000092). Review of
Financial Economics. 21 (2): 63–68. doi:10.1016/j.rfe.2012.02.001(https://doi.org/10.1016%2Fj.rfe.2012.02.001)
.
8. Kuepper, Justin. "Heikin-Ashi: A Better Candlestick"(http://www.investopedia.com/articles/technical/04/092204.asp).
Investopedia. Retrieved 28 June 2015.
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