In stock analysis, Japanese candlesticks are one of the most popular ways to display price information which includes the open, close, range and direction of trade for trading instruments such as equities and currencies. It was known to be developed by Homma Munehisa, a successful Japanese rice trader in the 18^th century.  The Japanese Candlestick makes price charts visually easy to read and understand, making it a favourite amongst traders, chartists and technical analysts.

A Japanese Candlestick resembles an upright rolling pin as it is composed of a body and two wicks (or shadows) on each side of the body.

The body represents the opening and closing price for the period. If the instrument closed higher than it opened, the candlestick should often be a white, blue or green colour to highlight an upward movement over the specified period. If the instrument closed lower than it opened, it should represent a black or red coloured body.

The wicks above and below the body (if it exists) represent the price range the instrument has traded over the specified period.  The longer the wicks, the larger the range the price of the instrument has traded.

How are they used?

Candlesticks can formulate different price patterns which can be used to help predict the trend of a security, and this is an important concept in stock analysis. There exist specific names that are attached to different types of candlesticks that display different lengths of body and wicks. Generally, they can be used as a timing tool to get into or get out of a trade.

A bullish signal is usually given if the lower wick is much longer than the upper wick, known as a ‘long lower shadow’ while a bearish signal is usually given if the upper wick is much longer than the lower wick, known as the ‘ long upper shadow’.

Additionally, if a bull run would follow a ‘long lower shadow’, it would be reflected by higher highs and higher lows as well as candlesticks with white bodies without wicks which are called ‘white marubozus’. Conversely in a bearish market, a downtrend would be represented by lower highs and lower lows with perhaps black bodies without wicks known as ‘black marubozus’ occurring after a ‘long upper shadow’.

So, when conducting stock analysis using charts, remember that Japanese candlesticks provide more information about price patterns than a normal line chart.

Digg

Stumble Upon

Del.icio.us

Buzz