Introduction to Candlesticks

One of the oldest tools to analyze markets was developed by Japanese in the 18th century in order to follow the rice market. They would draw a bar of each trading day, noting high, low, open and close, and paint the distance between open and close in a rectangle shape so that each bar would somewhat resemble a candle, thus the name of Candlestick Charting the way we call it today.

During past centuries, the technique has not been lost and came to the western world at the start of 20th century. Recently actually it has progressed to the point that most of the decent charting software offers it as a charting option.

Please note that each bar that has the closing price higher than the opening price is painted with the lighter color (in this case light greenish color), while the darker colored candles represent bars where the open is higher than the close (the red color). Most charting software offer ways to customize the colors, so you can tailor them to your liking.
The most basic way to look at the candlesticks is to notice ones that set themselves apart from the rest, especially in size. A long green candles represent bars where buyers were predominant force and pushed the market higher during the trading interval. It is indicative of an up trend and thus such candle normally signals a buy signal. The same but the opposite is true for the long red candle which signals a down trend.

See below how the trading opportunities existed to sell the market after the long red candle presented itself.

Those indicators go well with a trading strategy of trading in the direction of the trend. Maybe Japanese never heard of expression “Trend is your friend” and “Go with the flow”, but it seems they knew how to identify trends long before western traders did.

In the second part of candlesticks analysis I plan to show some of the most famous candlesticks patterns, and after that I can demonstrate how I actually use them in combination with other technical tools.

Look at this post for further Candlesticks info.