Candlestick chart History

    The Japanese using technical analysis and some early versions of candlesticks to trade rice in the 17th century. Much of the credit for candlestick development and charting goes to a legendary rice trader named Homma from the town of Sakata, Japan. While these early versions of technical analysis and candlestick charts were different from today's version, many of the guiding principles are very similar. Candlestick charting, as we know it today, first appeared sometime after 1850. It is likely that Homma's original ideas were modified and refined over many years of trading, eventually resulting in the system of candlestick charting that we now use.

In order to create a candlestick chart, you must have a data set that contains:

1. opening price
2. highest price in the chosen time frame
3. lowest price in the period
4. closing price values for each time period you want to display

    The time frame can be daily, 1 hour, 5 minutes, or any other period you prefer.

The hollow (white) or filled (red) portion of the candlestick is called "the body". The long thin lines above and below the body represent the high/low range and are called "shadows" (also referred to as "wicks" and "tails"). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow.

    Your job is to analyze the balance of power between the buyers and the sellers and bet on the winning group. Fortunately, candlestick charts reflect this fight and mass psychology in action.

Candlestick patterns tell us a great deal about the general trend of a stock and the power of the buyers or sellers in the market.

    Candles are always born neutral. After birth, they can grow to become either bearish, bullish or, on rare occasions, neither. When a candle is born, traders do not know what it will become. They may speculate but they do not know what a candle is until it dies (closes). After a candle is born, the battle begins. The bulls and the bears fight it out, and the candle displays who is winning. If buyers are in control, you will see the candle move up and form a bullish candle. If sellers are in control of the price, you will see the candle move down and become a bearish candle. That little candle is an excellent indicator to tell you who is currently winning the battle, the bulls(buyers) or the bears(sellers).

Indecision Candlesticks

• Spinning Tops
  
• Dojis

Spinning Tops

Dojis: Simple, Shooting Star, Hammer

    Dojis are another important candlestick pattern and come in different shapes and forms but are all characterized by having either no body or a very small body. A doji is also an indecision candlestick that is similar to a spinning top. When you see a Doji on your chart, it means there is a strong fight occurring between the bears and the bulls. Nobody has won the fight yet.

At times, Dojis will have unequal top and bottom wicks.

Shooting Star or Gravestone Doji

    If the top wick is longer, it means that the buyers tried unsuccessfully to push the price higher. These types of Dojis, such as the shooting star, are still indecision candlesticks, but they may indicate that the buyers are losing power and the sellers may take over.

Dragonfly or Hammer Doji

    If the bottom wick is longer, as in hammer Dojis, it means that the sellers were unsuccessful in trying to push the price lower. This may be indicate an impending takeover of price action by the bulls.

    All Dojis indicate indecision and possible reversals if they form in a tread. If a Doji forms in a bullish trend, it suggests that the bulls have become exhausted and the bears are fighting back to take control of the price. Similarly,  if a Doji forms in a bearish downward trend, it suggests that the bears have become exhausted and the bulls (buyers) are fighting back to take control of the price.

    After learning to recognize these candlesticks, it is important that you not get too excited too quickly. Candles are not perfect. If you take a trade every time you see a Doji formed a trend, you will end up with a significant losses. Always remember that these candles only indicates indecision and not a definite reversal. To use indecision candles effectively, you must look for confirmation candles and ideally use them with other forms of analysis such as support or resistance levels.

Candlestick Patterns

    Many traders love to identify complicated chart patterns and make trading decisions based on them. There are hundreds of imaginatively-named candlestick patterns that you will find an online search include Head-and-Shoulders, Cup-and-Handle, Abandoned Baby, Dark Cloud Cover, Downside Tasuki Gap, Dragonfly, Morning Star, Evening Star, Falling Three Methods, Harami, Stick Sandwich, Three Black Crows, Three White Soldiers, and many more. Believe me,  I did not make any of these names up. These candlestick patterns are really out there. As intriguing as their names might be, many of them, in my opinion, are useless and confusing. You can find yourself identifying bullish or bearish patterns depending on whether you are in a mood to buy or sell. If you are in a mood to buy, you will find a bullish pattern, eventually, somewhere. If you feeling like selling short, you'll "recognize" somewhere on your chart a bearish pattern like Head-and Shoulders. I am skeptical about even the most famous patterns, such as above mentioned Cup-and-Handle and Head-and-Shoulders Patterns.