Chapter 8

Redrawing the Price Bar: Japanese Candlesticks

In This Chapter

arrow Introducing candlesticks

arrow Going over a few specific patterns

arrow 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, the close at the high means strong bullish sentiment. Today charting services and software identify candlesticks by name and offer 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 ...

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