Introduction to Candle Sticks

Candlestick analysis is the base for Technical analysis.

Candlestick charts are thought to have been developed in the 18th century by Munehisa Homma, a Japanese rice trader of financial instruments.They were introduced to the Western world by Steve Nison in his book, Japanese Candlestick Charting Techniques. They are often used today in the stock analysis along with other analytical tools.

Description on Candle sticks

Candlesticks are usually composed of the body (black/white or green/red), and an upper and a lower shadow (wick). The area between the open and the close is called the real body, price excursions above and below the real body are shadows. The wick illustrates the highest and lowest traded prices of a security during the time interval represented. The body illustrates the opening and closing trades.

A black (or red) candle represents a price action with a lower closing price than the prior candle's close. A white (or green) candle represents a higher closing price than the prior candle's close. Thus, the color of the candle represents the price movement relative to the prior period's close and the "fill" (solid or hollow) of the candle represents the price direction of the period in isolation (solid for a higher open and lower close; hollow for a lower open and a higher close).

In trading, the trend of the candlestick chart is critical and often shown with colors..

However, do keep these assumptions in the back of your mind:

• Buy strength and sell weakness – Strength is represented by a bullish (blue) candle and weakness by a bearish (red) candle. Hence whenever you are buying ensure it is a blue candle day and whenever you are selling, ensure it’s a red candle day.
• Be flexible with patterns (quantify and verify) – While the text book definition of a pattern could state a certain criteria, there could be minor variations to the pattern owing to market conditions. So one needs to be a bit flexible. However one needs to be flexible within limits, and hence it is required to always quantify the flexibility.
• Look for a prior trend – If you are looking at a bullish pattern, the prior trend should be bearish and likewise if you are looking for a bearish pattern, the prior trend should be bullish.