Charting University » Candlesticks » Candlesticks vs Bar Charts
What are Japanese Candlestick charts, and why are they so popular?
If you have been trading for any length of time, you have probably heard of "Japanese Candlesticks" by now. Japanese candle chart analysis, so called because the chart formations - resemble old fashioned wax-and-wick candles. They have been used successfully by generations of rice traders in the Far East.
Traders who use candlesticks have a distinct advantage of quickly identifying various types of price actions which have a high probability to predict reversals or continuations in trends. This has always been one of the most difficult aspects of trading. The beauty of candlesticks is, when combined with Western technical analysis tools, candlestick pattern analysis can be a very useful way to select entry and exit points.
Why do Candlestick charts attract so many traders serious about increasing profits and decreasing risk? Because when you know how to properly use and interpret them, they work tremendously in your favor. Because they show "what traders have actually done", they're very reliable when used with the proper confirmations signals.
In my opinion, Japanese Candlestick charts provide unique visual cues that are much more visually appealing, and convey the price information in an easier manner than standard Western Bar charts. Trading with Candlestick charts allow traders and investors to better comprehend market sentiment. The psychological elements of Candlestick signals not only reveal trend reversals, but they provide the insights for understanding why that reversal is occurring. This becomes a very powerful trading and investment tool.
Red and Green? Black and White?
The "standard way" to draw and chart Japanese Candlestick Charts is to use the colors of BLACK and WHITE. White signifies "bullishness" and black stand for "bearishness". However, I don't do much in my life the "standard way". For this reason, and it also makes it easier for my brain to decipher, I have always programmed GREEN for "bullishness" - and RED for 'bearishness". You may build into your charts whatever colors you desire - as long as you understand their meanings.
The History of Candlestick Charts?
Candlestick charting is widely recognized as the oldest method of technical analysis on record. Dating back to the 17th century, the "Father of the Candlestick chart" is most often credited to legendary Japanese rice trader Homma Munehisa (1724-1803). Munehisa was a rice merchant from Sakata, Japan who traded in the Ojima Rice market in Osaka during the Tokugawa Shogunate. His trading success reputedly led to him becoming an honorary Samurai.
Mr. Munehisa discovered that the charts gave him an overview of the "open, high, low, and close" market prices over a self-determined period. He also found that the resulting charts would provide a fairly reliable tool to predict future demand. History shows that with his trading methods, Munehisa made a considerable fortune in his lifetime.
I have read that Charles Dow (1851-1902), co-founder of Dow Jones & Company, worked with Candlesticks before his death. But I have never found any solid evidence that anyone in the western world, at least no one who made it public, worked with the Candlestick methods until just the past 25-30 years.
Up until then they were kept a secret and known only to Japanese stock traders. Then in the 1980's, Steve Nison, a writer and stock trader, stumbled upon Candlesticks while talking to a Japanese stockbroker. He decided to research the ideas and is today credited to have brought Japanese candlesticks to America through his writings and teachings. The rest as they say - is history!
Candlesticks vs. Western Bar charts
- Candlestick charts provide unique visual cues that are easier to read and identify than a standard two-dimensional bar chart. Candlesticks were given colorful names by the Japanese traders, due in part to the military environment of the "Japanese feudal period" (12th - 19th century). These Candlestick formations include such memorable names as "Three Black Crows", "Three White Soldiers", "Bearish Engulfing", "Kicker", "Morning Star", " Spinning Top", "Bullish Hammer", "Hanging Man", "Shooting Star", and the ever feared "Gravestone", which is a sign of death and a bearish top to a current price trend.
Advantage: As you can see, these names are very memorable. Once you learn them with their respective patterns they are actually fun. Just as skill, strategy, and psychology are important in battle, they are also important elements when in the midst of trading battle. Candlesticks offer more data and detail than Bar charts formations.
- Western Bar charts are still perhaps the most widely used format of charting. I believe this is in-part because it was the theory that many traders and chart technicians were originally trained in. The high, low and close are required to form the price plot for each period of a Bar chart. The Bar chart formation shows a vertical line where the top indicates the highest price of the time period selected - and the bottom represents the lowest price for the same period. The closing price is then displayed on the right side of the bar, and the opening price is shown on the left side of the bar. As an example, on a 60-minute chart, each bar represents the high, low and close for the particular 60-minute period. Daily charts would have a bar for each day based on it's respective close and the high and low for that day.
Advantage: Bar charts can be effective for displaying a large amount of data, where Candlesticks can take up slightly more room and may look cluttered. The individual bars that make up the Bar chart are relatively thin, which allows you the ability to fit more bars across a given chart.
