What are candlesticks

Candlesticks are a type of chart used in technical analysis to represent price movement over a
specific time period. Each candlestick provides four key pieces of information about the
market during that period: the open, close, high, and low prices. This charting method is
popular because it visually represents market sentiment and price action clearly.

The history of candlesticks in trading dates back several centuries and has its origins in Japan,
where they were used to chart rice prices before becoming widely adopted in modern
financial markets. Here’s an overview of their development:

1. Origins in Japan (17th Century)

The concept of candlesticks was invented by Munehisa Homma, a Japanese rice merchant, in
the 17th century. He used candlesticks to track and predict the price of rice in the Osaka Rice
Exchange. Homma was a skilled trader, and he developed a system of charting rice prices
based on the psychological behavior of market participants.

 Munehisa Homma is often credited as the father of candlestick charting. He

discovered that price movements were not just about market fundamentals (supply
and demand) but also influenced by human emotions like greed, fear, and herd
mentality. By observing market psychology, he began using visual methods to track
price movements over time.
 He used candlestick patterns to represent open, high, low, and close prices over a
specific time period, which allowed him to better predict price trends and market
shifts.

2. Development and Spread to the West

While candlesticks were initially used only in Japan, the method gradually spread to the
West:

 Charles Dow (late 19th to early 20th century), the co-founder of Dow Jones &
Company and creator of the Dow Jones Industrial Average, popularized the idea of
price charts in the Western world, though his focus was on bar charts.
 Steve Nison, an American technical analyst, played a pivotal role in introducing
candlestick charting to the Western world in the 1980s. Nison's book, Japanese
Candlestick Charting Techniques (1991), was instrumental in bringing candlestick
analysis to mainstream traders in the U.S. and beyond.

3. How Candlesticks Became Popular in Modern Trading

 Rise of Technical Analysis: In the 20th century, as technical analysis became more
popular and sophisticated, candlesticks gained a following due to their visual appeal
and the insights they provide into market psychology.
  Adoption in Forex and Stock Markets: Today, candlestick charts are a standard tool
used by traders in various financial markets, including forex, stocks, commodities,
and cryptocurrencies.

4. Key Developments and Candlestick Patterns

Over time, traders and analysts refined candlestick charting, developing various patterns and
strategies based on the formations of individual candlesticks or groups of candlesticks. Some
of the key patterns and concepts include:

 Bullish Patterns: Patterns like the Hammer, Morning Star, and Engulfing suggest
potential upward price movements.
 Bearish Patterns: Patterns like the Shooting Star, Evening Star, and Dark Cloud
Cover signal possible downward price movements.
 Reversal and Continuation Patterns: These indicate whether a trend is about to
reverse or continue. For example, the Doji suggests indecision, while the Three
White Soldiers indicate a strong upward trend.

5. Candlestick Charts Today

Candlestick charts are now widely available in various trading platforms and have become a
fundamental tool in technical analysis. They provide real-time data and give traders insight
into price movements and trends, especially when combined with other indicators like
moving averages or the Relative Strength Index (RSI).

Key Components of a Candlestick:

1. Body: The rectangular part of the candlestick that represents the range between the
opening and closing prices during the time period.
o If the closing price is higher than the opening price, the body is typically green
or white (bullish).
o If the closing price is lower than the opening price, the body is typically red or
black (bearish).
2. Wicks (or Shadows): The thin lines above and below the body, representing the
highest and lowest prices reached during the time period.
o The upper wick shows the highest price during the period.
o The lower wick shows the lowest price during the period.
3. Open: The price at which the currency pair or asset opened for that time period.
4. Close: The price at which the currency pair or asset closed for that time period.
5. High: The highest price reached during the time period.
6. Low: The lowest price reached during the time period.

Candlestick Color Coding:

 Bullish Candlestick (Up Day): When the close is higher than the open (green or
white).
 Bearish Candlestick (Down Day): When the close is lower than the open (red or
black).
 Types of candlesticks
Single Candlestick Patterns

1. Doji
o Description: A Doji occurs when the opening and closing prices are almost
the same, resulting in a very small body and long wicks. It signifies indecision
in the market, indicating that neither bulls nor bears are in control.
o Significance: Doji candlesticks often signal potential reversals, especially
when they appear after a strong uptrend or downtrend.
2. Hammer
o Description: A candlestick with a small body near the top and a long lower
wick. It indicates that despite strong selling during the session, buyers were
able to push the price back up near the opening level.
o Significance: Typically found at the bottom of a downtrend, it suggests a
potential reversal to the upside (bullish reversal).
3. Shooting Star
o Description: The opposite of the Hammer, the Shooting Star has a small body
near the bottom with a long upper wick. It suggests that after a rally, sellers
took control, pushing the price back down.
o Significance: Usually occurs after an uptrend and signals a potential reversal
to the downside (bearish reversal).
4. Spinning Top
o Description: A candlestick with a small body and relatively long upper and
lower wicks. It indicates indecision in the market, as neither the bulls nor
bears could gain full control during the period.
o Significance: Spinning Tops may indicate a pause in the trend or a potential
reversal if seen after a long trend.
5. Marubozu
o Description: A candlestick with no wicks (shadows) or very short wicks,
indicating that the price moved strongly in one direction. A bullish Marubozu
has a long green/white body, while a bearish Marubozu has a long red/black
body.
o Significance: The absence of wicks signifies strong momentum in the
direction of the candlestick (bullish or bearish).
Multi-Candlestick Patterns

1. Bullish Engulfing
o Description: A two-candle pattern where a small red (bearish) candlestick is
followed by a large green (bullish) candlestick that completely engulfs the
previous one.
o Significance: Indicates a strong reversal from a downtrend to an uptrend
(bullish reversal).
2. Bearish Engulfing
o Description: A two-candle pattern where a small green (bullish) candlestick is
followed by a large red (bearish) candlestick that completely engulfs the
previous one.
o Significance: Indicates a strong reversal from an uptrend to a downtrend
(bearish reversal).
3. Morning Star
o Description: A three-candle pattern consisting of a long bearish candlestick,
followed by a small-bodied candlestick (which may be bullish or bearish), and
then a long bullish candlestick.
o Significance: Bullish reversal pattern that suggests the downtrend is losing
momentum and an uptrend may begin.
4. Evening Star
o Description: A three-candle pattern consisting of a long bullish candlestick,
followed by a small-bodied candlestick, and then a long bearish candlestick.
o Significance: Bearish reversal pattern that suggests the uptrend is losing
strength, and a downtrend may begin.
5. Harami (Bullish and Bearish)
o Description: A two-candle pattern where a large candlestick is followed by a
smaller candlestick that is contained within the range of the first one. The
color of the second candlestick determines if it’s a bullish or bearish Harami.
o Significance: The Bullish Harami suggests a potential reversal to the upside
after a downtrend, and the Bearish Harami suggests a potential reversal to the
downside after an uptrend.