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Japanese Candlesticks

Japanese Candlesticks
Charts of stocks futures indices or any item that changes price over time can be drawn in a variety of ways. Line charts and bar charts are a couple of common ways. Japanese candlestick charts are another popular way of charting. 

The main difference between Japanese candlestick analysis and Bar chart analysis is that the Japanese candlesticks place the highest importance on the relationship between the open and close of the same period while bar charts place the importance on the close as it relates to the prior period's close. The same data that are available on a candlestick chart is available on a bar chart however; it is difficult to see quickly and requires more study. 

The candlesticks color each bar based on whether it closed above its open (green) or below its open (red) so it is easy to tell who won the battle on that bar for that particular time frame.  By winning the battle we mean the bulls or the bears. Note that a candle may be closing under the prior candle and still be green if it closed above its open. This could happen if the stock gapped down at the open and then recovered and closed above that opening price.  With bar charts as long as the stock closes higher than the prior day's close it is a positive. However according to the Japanese view this is not necessarily a positive development. If on an up day the stock closes below its open the Japanese candle stick would regard it as negative. 

The high and low of the day are called tails and they stick out above or below the colored body. These are also called wicks as in the wick of a candle. A long tail at the top of the candle shows the bears were able to move the stock significantly as the stock closed well off its high. A long tail at the bottom of the candle shows the bulls were in control and were able to move the stock back up significantly as the stock closed well off its low. 

The different shapes and colors that these candlesticks form can give short term clues and accurately predict the direction the stock may take the next day.  There are many types of candles too many to list in this commentary.  Also a variety of different shaped candles can make up other bullish or bearish patterns and these patterns also have names.  For instance a combination of 3 candles in a 3 day period could result in a bullish or bearish pattern when combined and these patterns will have names of their own. From my experience I have found that candlestick charting is much more accurate in the short term as opposed to predicting long term direction of stock price movement.  Candle stick charts are very useful for day trading.

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