THE DIFFERENT TYPES OF CHARTS – CANDLESTICK CHARTS

Candlestick charts were developed by Japanese rice traders in the 17th century to have an easy overview of open, high, and low and close prices over a certain period. This charting style is very popular because of easiness in reading and understanding the charts. Since 17th century, there have been lots of efforts to relate chart patterns to its behavior in the future.

This method to chart prices proved to be particularly interesting due to the fact that four data points could be displayed instead of one single data point, thus containing more information. Those Japanese rice traders also found that the charts resulting from those candlesticks would provide a fairly reliable tool to predict future demand, thus giving them the chance to take advantage of future price fluctuations.

Below is the construction of the candlestick which unlike bar charts shows two colours dependant whether the price went up or down at that particular time period.

Candlesticks are usually composed of a central coloured body, and two shadow lines: an upper head and a lower tail. However, a candlestick does not necessarily need body and/or wick. The trading range in terms of opening, high, low, and closing price determine the shape of the candlestick. A white (or sometimes green or blue) body signals a higher closing price compared to the opening price, whereas a black (or sometimes red) body indicates a lower closing price as compared to the opening price.

This is a construction of bars that make up a candlestick chart:

Due to the nature in which candlestick charts are constructed they make common patterns that do not necessarily rely on other technical indicators. Traders may use these patterns to form a consensus of market direction especially during periods of heavy trading volume and after large moves in the market.

Overleaf we are going to explore some of the basic candlestick patterns and what possible outcome they may have when making a trading decision.