Japanese
candlesticks
What is a Candlestick?
While we briefly covered candlestick charts in the previous lesson, we’ll
now dig in a little and discuss them more in detail. First let’s do a quick
review.
What is a Candlestick?
The Japanese created their own old school version of technical analysis to
trade rice. A westerner by the name of Steve Nison “discovered” this secret
technique on how to read charts from a fellow Japanese broker and Japanese
candlesticks lived happily ever after. Steve researched, studied, lived,
breathed, ate candlesticks, began writing about it and slowly grew in
popularity in 90s.
Okay so what are candlesticks?
The best way to explain is by using a picture:
Candlesticks are formed using the open, high, low and close.
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If the
close is above the open, then a hollow candlestick (usually displayed as
white) is drawn.
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If the
close is below the open, then a filled candlestick (usually displayed as
black) is drawn.
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The hollow
or filled section of the candlestick is called the “real body” or body.
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The thin
lines poking above and below the body display the high/low range and are
called shadows.
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The top of
the upper shadow is the “high”.
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The bottom
of the lower shadow is the “low”.
Real Bodies and Strange Shadows
Candlesticks have different body sizes. Long bodies indicate strong buying
or selling. The longer the body is, the more intense the buying or selling
pressure.
Short bodies imply very little buying or selling activity. In forex
terminology, bulls mean buyers and bears mean sellers.
Long white candlesticks show strong buying pressure. The longer the white
candlestick, the further the close is above the open. This indicates that
prices increased considerably from open to close and buyers were aggressive.
Long black (filled) candlesticks show strong selling pressure. The longer
the black candlestick, the further the close is below the open. This
indicates that prices fell a great deal from the open and sellers were
aggressive.
Mysterious Shadows
The upper and lower shadows on candlesticks provide important clues about
the trading session.
Upper shadows signify the session high. Lower shadows signify the session
low.
Candlesticks with long shadows show that trading action occurred well past
the open and close.
Candlesticks with short shadows indicate that most of the trading action was
confined near the open and close.
If a candlestick has a long upper
shadow and short lower shadow, this means that buyers bided
prices higher, but for one reason or another, sellers came in and drove
prices back down to end the session back near its open price.
If a candlestick has a long lower
shadow and short upper shadow, this means that sellers forced
price lower, but for one reason or another, buyers came in and drove prices
back up to end the session back near its open price.
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