Candlestick Basics: Part 1

 

Go to Candlestick Basics Part 2 - Candlestick Charts: Patterns Part 1

Background
It is believed that Candlestick trading first appeared sometime during the 19th Century. The development of the Candlestick is credited to Japanese rice traders and it is more than likely that the concept evolved over many years into what we see on our charts today.

Formation
Just like the traditional Bar chart, each Candlestick displays an open, high, low and close over a given time period. Depending on the fill of the body you can tell at first glance whether the candle closed higher or lower than it opened.

It is also important to pay attention to the high and low formations displayed by the shadows/ wick/ tails. These can form the basis of important Candlestick patterns that can help predict the future market direction.

Candle Vs Bar Vs Line
Most people prefer using a Bar or a Candlestick chart over a line chart because of the extra information displayed to the user. A line chart is unable to show highs and lows during a set time period and therefore it often fails to display vital information about the price action. As you can see from the picture below the same data over the same time period can look very different depending on the chart you use.

The reason why an individual would generally prefer to use a Candlestick over a traditional Bar chart is completely aesthetical. After all, both are displaying the same data but the filled Vs hollow structure of a candle’s body is very easy on the eye and quick to interpret.