The Visual Investor: How to Spot Market Trends, Second Edition

APPENDIX B

Japanese Candlesticks

Japanese candlestick charts, discussed in Chapter 3, are an alternative to the more traditional bar chart. Considered to be the oldest form of charting in the world, Japanese candlesticks were introduced to the western world by Steve Nison in his book Japanese Candlestick Charting Techniques (Prentice Hall, 2002). Many traders find candlesticks more visually attractive than bar charts and believe that candlesticks include more valuable price information. Figure B.1 compares the two forms of charting and shows how the candlestick is constructed. Both charts use the same four pieces of daily information—the open, the high, the low, and the close. (All of the figures in this Appendix are taken from the “Introduction to Candlesticks,” which is included in the StockCharts.com ChartSchool).

On the candlestick, the difference between the high and low (the range) is marked by a thin line which is called the shadow. The difference between the open and close is marked by a box which is called the body. The upper part of Figure B.1 shows a white body and a black body. A white body is formed when the day’s closing price is higher than the open (which is considered bullish). A black body is formed when the day’s closing price is lower than the open (which is considered bearish). While the color of the box is important, so is its size.

Figure B.2 shows long versus short bodies. Generally speaking, the longer the body (box), the more intense is the buying or ...