Candlestick Charts And The Stock Market : From Rice To Riches
The concept of candlestick charts is said to have originated in the 18th Century by a Japanese rice trader named Homma Munehisa as a way to analyze rice prices over periods of time. Homma’s method was immediately popular with other rice traders because it allowed five data points to be displayed simultaneously. Additionally, it was easier for rice traders to predict future demand for their rice based on the trends and patterns shown by the candlestick charts.
The infamous Charles Dow adapted the candlestick method in 1900 to chart stock market trends, and the method is still very popular today. Candlestick charts are now used to analyze stock, commodity, options, and foreign exchange trading. Traditionally, they are used in bar-type charts as a way to track shifts in equity over periods of time. Just as was true with the rice traders, investors and traders today like candlestick charts for their ability to express complex data in a relatively simple format.
The term “candlestick chart” is derived from the long, narrow shape of the symbol used to communicate the data. The sticks themselves consist of three parts: The body, which is either black or white, an upper shadow and a lower shadow, (which together make up the wick). More recently, red and green have replaced the black and white bodies.
Because of the constantly changing variables measured by the candlesticks, multiple patterns can emerge from them. Traders quickly learn the meanings of common patterns and consider them in their decision making. For example, an all white (or green) candlestick with no upper or lower wick indicates dominant, bullish trades, and predicts that continued bullish trades are likely. In contrast, an all black (or red) candlestick, called Marubozu black, shows dominant bearish trades.
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