Introduction to Japanese candlesticks

Japanese candlesticks are great method of preparing price charts. Candlestick chart has a huge advantage over linear chart or OHCL (Open, High, Low, and Close) chart. It shows more information: trend, strength of movement, relation between bears and bulls. It can also generate signals to open or close much faster. Sometimes only one candlestick is enough. 90% of stock charts I analyze are candlestick charts.

In Japan, candlesticks are most popular method of technical analysis. It has XVII century tradition coming from rice market.

To prepare a candlestick chart, there are used four values for each data point: opening price, closing price, highest price and lowest price. How they are shown?

In general, we distinct hollow and filled candlesticks.

When closing price is higher than opening price, we get a hollow candlestick, which has white body - rectangle. Upper border responds to closing price, bottom responds to opening price. If the highest price was higher than the closing price, we see upper shadow in form of thin line above the candlestick body. Analogously with the lowest price, if it was lower than closing price, we get the lower shadow.

Filled candlesticks are similar, except for one difference. Closing price is lower than opening price. In such case, the body is black and upper border respond to opening price, while bottom to the closing price. Upper and lower shadows are exactly like in hollow candlesticks.

If you are new to the candlesticks, I strongly advise to dedicate some time to browse such charts. Try comparing them with linear and OHCL charts. This way you will get used to it and pretty soon you will be able to easily read shown data.

In my next post concerning this subject, I will show and discuss types and meaning of different candlesticks.

S&P500