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] Candlestick charts can also be built using intervals shorter or longer than one day.
It is similar to a bar chart in that each candlestick represents all four important pieces of information for that day: open and close in the thick body; high and low in the “candle wick”. Being densely packed with information, it tends to represent trading patterns over short periods of time, often a few days or a few trading sessions.[2]
Candlestick charts are most often used in technical analysis of equity and currency price patterns.[citation needed] They are visually similar to box plots, though box plots show different information.[citation needed]
History
Candlestick charts are thought to have been developed in the 18th century by Munehisa Homma, a Japanese rice trader.[3] They were introduced to the Western world by Steve Nison in his book, Japanese Candlestick Charting Techniques. They are often used today in stock analysis along with other analytical tools such as Fibonacci analysis.[4]
Description
The area between the open and the close is called the real body, price excursions above and below the real body are shadows (also called wicks). Wicks illustrate the highest and lowest traded prices of an asset during the time interval represented. The body illustrates the opening and closing trades.
If the asset 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 asset 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. 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 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. In practice, any color can be assigned to rising or falling price candles. A candlestick need not have either a body or a wick. 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.[4]
Rather than using the open, high, low, and close values for a given time interval, candlesticks can also be constructed using the open, high, low, and close of a specified volume range (for example, 1,000; 100,000; 1 million shares per candlestick).[citation needed] In modern charting software, volume can be incorporated into candlestick charts by increasing or decreasing candlesticks width according to the relative volume for a given time period.[5]
Usage
Candlestick charts are a visual aid for decision making in stock, foreign exchange, commodity, and option trading. Looking at a candlestick, one can identify an asset’s opening and closing prices, highs and lows, and overall range for a specific time frame.[6] Candlestick charts serve as a cornerstone of technical analysis. 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.
A candlestick pattern is a particular sequence of candlesticks on a candlestick chart, which is mainly used to identify trends.[citation needed]
Disadvantages of candlestick chart: 1. An individual trader learns the market news most likely much later than the big players
2. An individual trader is not able to translate market news into trading action: it takes a lot of experience and knowledge in finance to do that.
Heikin-Ashi candlesticks
Heikin-Ashi (平均足, Japanese for 'average bar') candlesticks are a weighted version of candlesticks calculated in the following way: [7]
- Close = (real open + real high + real low + real close) / 4
- Open = (previous Heikin-Ashi open + previous Heikin-Ashi close) / 2
- High = max(real high, Heikin-Ashi open, Heikin-Ashi close)
- Low = min(real low, Heikin-Ashi open, Heikin-Ashi close)
The body of a Heiken-Ashi candle does not always represent 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.[citation needed]
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.
References
- ^ "Stock Analysis - an introduction to candlesticks". Stockcharts. Retrieved 22 October 2019.
- ^ Grant, Mitchell. "Understanding Japanese Candlestick Charts". Investopedia. Retrieved 22 October 2019.
- ^ Gregory M., Morris (2006). Candlestick Charting Explained: Timeless Techniques for Trading Stocks and Futures. McGraw-Hill. ISBN 9780071461542.
- ^ a b Nison, Steve (2001). Japanese Candlestick Charting Techniques (2nd ed.). Prentice Hall Press. ISBN 9780735201811.
- ^ "CandleVolume [ChartSchool]". Stockcharts. Retrieved 22 October 2019.
- ^ Lu, Tsung-Hsun; Shiu, Yung-Ming; Liu, Tsung-Chi (2012-04-01). "Profitable candlestick trading strategies—The evidence from a new perspective". Review of Financial Economics. 21 (2): 63–68. doi:10.1016/j.rfe.2012.02.001.
- ^ Mitchell, Cory. "Heikin-Ashi technique". Investopedia. Retrieved 18 August 2020.