Chapter 1 - Use of Candlestick charts

Candlestick chart was developed in 1700s in Japan by a man named Munehisa Homma, originally designed to trade rice futures in the 17th century, he invented a method to analyze the price with an overview of the open, high, low and close prices of each trading day over a certain period of time.

A line, known as shadow, was drawn to show the day’s price range and a broader part of the candlestick represents the area between the session’s opening price and the closing price, known as real body. If the opening price is lower than the closing price (i.e. a rising day), then the body is white; if the opening price is higher than the closing price (i.e. a falling day), then the body is black.

As the style of charting is relatively easier to read and understand, it became very popular and analysts relate the chart patterns to various bullish or bearish signals, which were considered quite reliable in predicting future market directions.

The colour (white or black) and the length of the real body exhibits the market forces, whether bulls / demand or bears / supply are winning. Generally speaking, the long the body indicates the more intense in buying or selling pressure (e.g. long white candlesticks reveal strong buying interest, i.e. buyers are very aggressive) whilst short real body normally suggests indecisive market situation and further sideways consolidation would take place. According to different combinations of candlesticks, various bullish and bearish patterns were found and we are going to discuss some of the patterns we did not cover in the part 1 of this book here.

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