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Both Japanese and Western analysts look at three as an important number. R.N. Elliott spelled out the significance of three impulse waves in his Elliott Wave theory, and many of the most reliable candlestick chart patterns require three candlesticks to reveal what is happening with price action. Prices often unfold in three phases reflecting the psychological attitude of the trading masses – the unbelieving or skeptic phase, then a realization and acceptance of the developing trend, then a period of jumping on the bandwagon of the trend move before it all starts to unravel, first with doubts about a trend change as the original trend loses momentum, then with fear about missing or not being onboard the new trending move and then with giving in to the reality of the trend change. The cycle repeats itself over and over, as analysts from both the East and West have recognized with their different styles of charts.  There is something in this type of price action that seems to be universal and basic to human behavior in any chart language.

Constructing Candlestick Charts

Japanese candlestick charts can be drawn for any time period.  The most popular time interval to plot is one day, with its obvious and readily available open, close, high and low prices.  Short-term traders may choose to plot time intervals measured in minutes.  For example, a 30-minute candlestick chart could divide the 6.5 hours of the New York Stock Exchange trading day into 13 intervals, using the first price in each half-hour interval as the open and the last price in each half-hour interval as the close.   

Longer-term investors consult weekly candlestick charts, using Monday's open and Friday's close to define a weekly candlestick chart’s real body.  Monthly candlestick charts are constructed using the first trading day of the month’s open and the last trading day of the month’s close to define the monthly real body.

Japanese candlestick charts are fully compatible with Western charting techniques because they are nearly the same as Western bar charts, except that the range between the opening and closing prices is highlighted and given special emphasis in candlestick chart interpretation. The high and the low price for a period are represented exactly the same way in both Western bar charts and candlestick charts.