Redrawing the Price Bar: Japanese Candlesticks
In This Chapter
Going over a few specific patterns
Using candlesticks with other market tools
Candlestick charting displays the price bar in a graphically different way from the standard bars described in Chapters 6 and 7. Candlestick charting was developed in Japan at least 150 years ago, where traders applied it to prices in the rice market.
A trader named Steve Nison brought candlesticks to the attention of western traders in 1990. Candlestick patterns became instantly popular because they embody the principle of imputing trader sentiment to the bars, as in “shaven top,” where the close is at the high. As I say in Chapter 6, close at the high means strong bullish sentiment. Today you can buy software that identify candlesticks by name and give guidance on interpreting them.
In this chapter, I break down the components of a candlestick and explain why candlesticks are so useful. Note that in some instances, a stand-alone candlestick is a “pattern” in its own right, and such candlesticks always have a name. (For more on patterns, check out Chapter 9.) Named candlesticks and small series of candlestick patterns number in the dozens, and I can’t cover all of them in this chapter. I select a few candlesticks and combinations that stand out. If candlestick charting appeals to you, check out Candlestick Charting For Dummies by Russell Rhoads (Wiley).
Appreciating the Candlestick Advantage