Japanese candlesticks

Japanese candlesticks were invented in the 1600s to follow the evolution of rice prices in what was then the first market on the planet. They were later popularized by Steve NISON.

A candlestick represents a unit of time. The reading is carried out in the same way on the different time units: whether it is one minute, one hour or one month, the principle remains the same.

 

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As you can see, a red candlestick represents a decrease in the unit of time considered. A green candle represents an increase. The candle body is represented by a rectangle and the ”wicks” (or ”shadows”) at the top and bottom of the candle holder represent the highest / lowest of the period considered.

This configuration, which is highly appreciated by technical analysis professionals and traders of all kinds, is probably the most widely used graphical representation of prices in professional circles because it provides a wide variety of information about the period studied (in particular the opening and closing prices, as well as the high/lowest).

 

The curve

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The easiest way to represent a stock chart is to use a solid line that links prices together. The horizontal axis represents the date and the vertical axis represents the prices, here on Bitcoin.

This graph, often used to represent a change over time and to give meaning to certain economic figures, is not very relevant to trading, however, because it does not give us any information except the price at a certain date.

 

Bar graph

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A bar graph provides a complete representation of the evolution of the period under study, much like Japanese Candlesticks. Their use is very similar to it: each ”bar” represents one period, with the high/lowest, the opening and closing price.

 

Heikin Ashi

 

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The Heikin Ashi chart makes it easy to identify trends

 

This model was developed by a Japanese man who wanted to improve the classic Japanese candlestick model by erasing some irregularities. While each Japanese candlestick only considers the period studied: opening, closing, highest and lowest price, the Heinkin Ashi candlestick considers the two previous candlesticks, which gives a smoother, less erratic result.

 

Opening: (Opening -1 + Closing -1)/2

High (highest): highest of the three values: High, Open, Close

Low: lowest of the three values: Low, Open, Close

Closing: (O+H+L+C)/4

 

This significantly changes the analysis. Indeed, no more question here when reading this kind of candlesticks as we would with traditional figures: hammer, swallower, etc…. it is necessary to refer to a particular reading:

A succession of green candles without shadows or low wicks indicates a very marked upward trend.

A succession of red candles without shadows or high wicks indicates a very marked downward trend.

A very small candle (green or red), with large shadows (considered in traditional Japanese candleholders as ”doji”) will refer to indecision in the market and a possible reversal.

 

This type of graphical representation allows prices to be smoothed, erasing certain irregularities called “market noise” and easily highlights the general trend, making it a favorited tool for all trend followers.


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