Candlesticks - Interesting Paragraphs

Interesting Paragraphs

Charts play the central figure in a trader’s life- as they show how the prices moved. Traders in eras before experimented with different types of charting types but none of them reached wide popularity. Until one fine day, when Steve Nison, a trader who had traveled through Japan, introduced the West with the Candlestick charts. He was so impressed by them that he had predicted back in the 1980s that the whole world would use them one day. He was right.

  • Munehisa Homma, a Japanese rice contract trader in the late 1700s, had discovered that prices are greatly affected by the emotions of the traders. He wanted to account for them while analyzing the price movements, and he came up with Candlestick charts.

  • These charts showed the supply and demand characteristics of the prices visually by plotting open, high, low, and close of the prices sequentially for a given timeframe. Open and close are connected in an enclosed rectangle, whereas the high and low are located outwards. This whole setup looks like a candle where the wick is outside, thus the name.

  • Apart from showing the direction of price movements, they also give subtle cues about the buying or selling pressure. The price movements dictate how the resultant candlestick pattern would look.

  • Single and sometimes multiple candlesticks form patterns that communicate a certain quality about the price movement. For example: when the price goes up and makes a high, then goes down making a low, and then moves up near where it originally was — this forms a pattern called Doji. It signifies indecision among buyers and sellers. If you had been looking into just line charts, you would’ve missed this subtle cue that the market showed you.

  • Candlestick Charts are similar to storybooks, where not all paragraphs are equally important. Individual Candlesticks are the paragraphs, and when taken together, they tell us the story behind the price movements. Few show critical details before a big twist, whereas some are insignificant to the main story. This is the same case with candlesticks. So I wouldn’t recommend you make decisions solely based on a candlestick pattern, instead, use them in a combination with other things. There are few schools of thought that consider only candlesticks (or tick by tick price reading) and nothing else, but that is a different module.

We will cover more such patterns in the next section, and they are all unique with even more unique Japanese names. After instant noodles and Shinchan, this is the greatest gift of Japan to the world.