An Introduction To CANDLESTICKS, PART 1

PART 1

AN INTRODUCTION TO CANDLESTICKS

Technical Analysis vs. Fundamental Analysis

There are two types of ways to analysis the price of a stock, fundamental
analysis, and technical analysis. Fundamental analysis is used to gauge the
price of a stock based on the fundamental attributes of the stock, such as
price/earnings ratio, Return on invest, and associated economic statistics.

Technical analysis deals more with the psychological component of trading a
stock, and is influenced for the most part on emotionalism.

The technical analyst is seeking to answer the question "how are other traders
viewing this stock, and how will that affect the price in the immediate future".

As you will see, the candlestick chart is the most effective way to gauge the
sentiments of other traders.

History of Candlestick Charts

The Japanese were the first to use technical analysis to trade one of
the world's first rice futures markets in the 1600s. A Japanese man by
the name of Homma who traded the futures markets in the 1700s
discovered that although there was link between supply and demand
of the rice, the markets were also strongly influenced by the emotions
of the traders.

Homma realized that he could benefit from understanding the
emotions to help predict the future prices. He understood that there
could be a vast difference between value and price of rice.

This difference between value and price is as valid today with stocks,
as it was with rice in Japan centuries ago.

The principles established by Homma in measuring market emotions in
a stock are the basis for the Candlestick Chart analysis, which we will
present in this seminar.

Candlestick vs. Western Charts

The Western bar chart is made up of four parts components, open,
high, low, and close. The vertical bar depicts the high and low of the
session, while the left horizontal line
represents the open and the right
horizontal line represents the close.

Figure 1

The Japanese Candlestick Line (Figure 2) uses the same data (open,
high, low, and close) to create a much more visual graphic to depict
what is going on with the stock. The thick part of the candlestick line
is called the real body. It represents the range between the session’s
opening and closing prices. If the real body is red, it means that the
close of the session was lower than the open. If the real body is
green, it means that the close was higher than the open. The lines
above and below the body are the shadows. The shadows represent
the session’s price extremes. The shadow above the real body is
called the upper shadow and the shadow below the real body is called
the lower shadow. The top of the upper shadow is the high of the day,
and the bottom of the lower shadow is the low of the day.

Figure 2