tactical trader

The origins of Japanese candlestick charting can be traced back around 300 years to the Japanese rice markets where they were used to predict the price of rice. Perhaps one of the earliest trading gurus was Munehisa Homma who is said to have made a huge fortune from rice trading using candlestick analysis in this era.

Today candlestick charting remains very popular, with numerous books about the subject and software packages that are capable of not just drawing the charts but also analysing the various candlestick formations.

In this article I will give you an introduction to candlestick charting along with a brief description of some of the popular chart patterns that analysts look for.

Anatomy of a candle

Candlestick charts make use of the same four basic pieces of information as bar charts: the open price; the high; the low; and the close price. Unlike bar charts, it is much easier to quickly identify the direction and range of the market for the duration of the candlestick.

Candlestick charting can be used for any instrument and timeframe providing those four pieces of information are available.

There are two types of candlestick: a white candle representing a close price higher than the open price; and a black candle representing a close price lower than the open price. These are illustrated below:

As you can see the body of the candlestick represents the range between the open and closing prices, and the upper and lower shadows (also referred to as the wicks) represent the high and low prices. Traditionally candlestick analysts consider the open and close prices as the most important which is why they are shown so clearly on the chart.

Candlestick charting components

Analysis of candlestick charts involves the identification of both the six basic candlestick components described here and the more complex patterns that they form in an attempt to predict future prices. We will look at the more complex patterns in a moment, but first here are the six basic components:

White candlestick…