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Japanese Candlestick Charts Tutorial

Candlestick charts provide the same information as a bar chart – open, high, low and close prices – but do so in a way that is a more visual depiction of price action during a single time period or series of time periods.

One candlestick itself can provide important information about the strength or weakness of the market during a given day or other time period, visually portraying where the close is relative to the open. Although one candle can be significant, depending upon its location on a chart, a candlestick pattern usually takes several candlesticks to produce chart formations that give the best signals. Candlesticks may look identical but have an entirely different meaning after an uptrend than they do after a downtrend.

Because they can be used in analysis in much the same way as bar charts, candlestick charts have quickly become a favorite of traders and analysts since being introduced to the West in 1990. Candlestick analysts have also added a little mystique to candlestick charts by giving various patterns clever names and providing more descriptive characteristics for these patterns than is the case in typical bar chart analysis. Both types of charts have their double tops, inside days, gaps and other formations. But candlestick analysis ascribes more meaning to the candlestick "bodies" – price action between the open and close – and to the "shadows" or "tails" – price action that takes place outside of the open-close range for a period.

Because of their popularity in recent years, you should become acquainted with the nuances and terms of candlestick charts if you aren't already.

Candlestick Chart Basics

Japanese traders had been using candlestick charts and categorizing various candlestick chart patterns for centuries before the concept began to draw a lot of attention in the West after several books were published in the English language on candlesticks in the early 1990s.

Steve Nison published the first book, Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East, in 1991 and added another book a few years later, Beyond Candlesticks: More Japanese Charting Techniques Revealed. Greg Morris' book, Candlestick Charting Explained, in 1992 thoroughly described and quantitatively tested candlestick patterns, reporting that many were highly reliable. Since then, a number of other authors have written books on candlestick chart analysis.

Early Japanese rice producers and traders became wealthy using candlestick charts, applying some of the rules that are familiar to traders today: trade with the trend, prices that go up require more force to maintain an uptrend than falling prices, when in doubt about a trend, stay out . . .

East Meets West

The quick acceptance of candlestick charts in the West, once they were introduced, is due their similarity with bar charts that traders in the West had been using for years. Any Western techniques that traders used to identify chart patterns could also be applied directly to candlestick charts. Today most computer programs can construct candlestick charts as easily as bar charts.

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