Candlesticks have become one of the most popular methods for reading stock prices. When evaluating stock, commodity, option, or market values, the Japanese Candlestick not only provides all price data, but it also gives you a visual identification of buyer and seller demand.
This document is a beginners explanation to reading Japanese Candlesticks.
For any trader/investor who wishes to evaluate and make decisions using charts, the Candlestick will become your closest ally.
History
Needless to say, Japanese Candlesticks originate from Japan. Somewhere around the 1600’s in Fuedal Japan, Rice Traders began plotting the price of rice. At the time, rice was the predominant method of currency, and a Rice Exchange actually formed.
As one can imagine, without the help of computers, plotting prices was quite painstakingly difficult, and so the method of Candlesticks were developed.
To put this into perspective, while the Candlestick was being used to plot the changing prices of rise in Japan, Europe was in the midst of Tulipmania, which subsequently resulted in an economic crash. Whilst both the Japanese and the Dutch were using a crude form of Futures contracts to purchase rice and tulip bulbs respectively, only the Japanese were using a visual aid to analyze and plot the price changes.
Up until the early 1990’s, however, Candlesticks were still not predominant in the western world. Renowned author Steve Nison translated much of the material available in Japan on the subject, producing one of the most widely read books today: Japanese Candlestick Charting.
Westerners had been using a cruder technique of price plotting called Bar Charts. They depict the same information, however, the Candlestick offers far greater benefits as a visual aid. This is due to the depth of its body (see further sections for explanation).
Today, Japanese Candlesticks are one of the most predominant methods for evaluating price, with nearly all software packages providing this technique. For the trader/investor who is able to proficiently read candlesticks, a great insight is provided into the balance between buyers and sellers.
Price
The daily movement of a stock price consists of 5 pieces of data:
• Open price
• Close price
• High price
• Low price
• Volume
Candlesticks represent all of this information except Volume (Equivolume candlesticks are not discussed in this paper). Therefore, by using the candlestick as our price evaluation technique, we are able to visualize whether the day was dominated by buyers or sellers, whether there was weakness in buyers or sellers, and the relationship of the days’ movements compared to previous days.
Other methods to evaluate price movement include:
• Line Chart – only one price is represented (typically the closing price), but is a simple method to view price activity.
• Bar Chart – similar to a Candlestick, but does not have a body.
• Point and Figure Charting – one of the first methods of analyzing price movement, they evaluate price movement by marking an X for an upward movement, and an O for a downward movement.
Analysis of price is the base to where most traders/investors begin. To put it simply, by analyzing the price, we are attempting to determine whether or not that price is “over-valued” or “under-valued”. Other factors will also apply in this determination, but analysis of the price is the starting point in an effort to follow the golden rule:
Buy Low … Sell High
Make-up of a Candlestick
There are two sections to a candlestick:
- The body
- The shadow
Candlestick Body
The body represents where the open and closing prices are.
For a candle that has an open body, the opening price is at the bottom of the body and the closing price is at the top of the body
For a candle that is solid, the opening price is at the top of the body and the closing price is at the bottom.
Color is used to determine whether today’s close is higher or lower then the previous days close.
To read the full rticle, go to http://www.fmranalysts.com/education/Candlesticks.pdf
Matthew Brown
www.fmranalysts.com
info@fmranalysts.com
Source: http://www.ArticlePros.com/author.php?Matthew Brown
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