The Japanese have used Candlestick charting for centuries.
Candlestick charting is more popular than ever today as it adds an extra dimension to trading to give any trader an edge.
If you are serious about making money, then you should consider candlestick-charting techniques.
History of Candlestick Charting
In the 1700's, Homma, a Japanese trader in rice, noticed how the price of rice was influenced by not only supply and demand, but also how the price was strongly influenced by the psychology of traders. He understood that when emotions came into play a vast difference between the value and the price of rice occurred.
This difference between the value and price of any commodity is as applicable to markets today as it was in rice centuries ago.
The re-emergence of Japanese candlestick charting in recent years owes much to the writing of Steve Nison, whose book, "Japanese charting techniques," is considered the definitive recent work on the subject.
Advantages of candlestick charts include:
1. They can Complement other Technical Tools
You can use Candlestick charts with a number of other common technical indicators such as stochastics, moving averages; Bollinger bands etc. and they can act as an additional filter for trades.
2. Provide Advance Warnings of Market Reversals
Because of the way candlestick charts are drawn, they can give warnings of market reversals far quicker than traditional bar charts, and are a great way to spot overbought or oversold scenarios.
This can of course improve market timing and bottom line profits.
3. They're Easy for Everyone to Use
Because candlestick charts use, the same open, high, low and close data that traditional bar charts use, they are easy to use for both novice and experienced traders.
4. Unique Insight into Market Momentum
The way the candlestick chart is drawn not only gives the direction of price, but also the momentum behind the market move. This is down to the way the candlestick chart graphically illustrates the relationship behind the open, high, low, and close by the drawing of the candlestick chart.
Just like a bar chart, a daily candlestick line contains the market's open, high, low and close for the days trading.
However, candlestick charting adds an extra dimension in the way that they are drawn.
The candlestick has a wide part, called the "real body." This real body represents the range between the open and close of that day's trading.
When filled in black, the real body means the close was lower than the open.
If the real body is empty, it means the exact opposite: the close was higher than the open.
Above and below the real body are the "shadows." Chartists see these as the wicks of the candle, and it is the shadows that show the high and a low price of that day's trading.
If the upper shadow on the filled-in body is short, it indicates that the open that day was closer to the high of the day. Conversely, a short upper shadow on a white or unfilled body indicates the close was near the high.
5. Candlesticks Made Easy
Candlestick charting programs such as Supercharts, Tradestation, Incredible charts and many others include candlestick charting as a standard option, making them easy to incorporate into your trading strategy.
If you are trading with Fibonacci numbers, Dow Theory or a breakout method, candlestick charts can be incorporated and give an extra dimension to your trading.