We might look at them every single day and dream of them but do you actually know the history of the candlesticks used on charts, otherwise known as Japanese candlesticks. Believed to have been born as the idea of Munehisa Homma in the 1700s, Japanese candlesticks first appeared in Japan. Munehisa was a Japanese rice trader and apparently identified that fear and greed affected the price of the markets, in addition to the law of supply and demand. The principle of the Japanese candlesticks is to measure the emotions in the market.
The candlestick allows the trader to read more into the sentiment of the market that could otherwise be seen with a line graph. The time period a candlestick represents is often changed to help the trader get a holistic overview of the market ’emotion’. These time periods usually range from minutes, hours, days and a month allowing the trader to zoom in to what is going on for intraday trading and also understands what has been going on over longer periods and even many years.
Because of the way the candlestick is formed it is easy to see if the market is moving up or down during the time period of a candlestick. It also makes it easy to see what the open and close of the period are as well as the high and low of the period. This gives traders vital information about the market sentiment that otherwise might not be seen in a typical line chart, which is what has fuelled the popularity of the candlesticks over other charting methods.
Another key point that have given candlesticks a lot of traction with traders is the indicators that are produced by the candlestick patterns either alone or when grouped together. Single candlestick formations can reveal important information to traders. The upper and lower wick length as well as the length of the body and direction can indicate a multitude of different things. The various formations have become so recognisable that the patterns have been named. Such names include Yo Sen, In Sen, Doji, Gravestone Doji, Dragonfly Doji, Spinning Top, Marubozu, Shooting Star, Hammer, Hanging Man and Inverted Hammer and other names.
When two candlesticks appear side by side in certain formations it also provides indicators it can often be more revealing than a single candlestick. Of course these type of indicators must be cross referenced with some form of fundamental analysis and other technical indicators to be reliable but they have proven time and time again to reveal that valuable information in the markets. Names of double candlestick patterns include Bullish Engulfing, Bearing Engulfing, Kicking Pattern, Dark Cloud Cover, Bullish Harami Line, Bearish Harami Line, Matching Low and Piercing Line and more.
There are of course are a lot of other technical indicators that must be taken into account but Japanese candlesticks is the primary indicator that traders use.