How to understand candlesticks

This month we will take a look at a sub-division of the world of charting and technical analysis – the Japanese candlestick chart and a couple of associated patterns.

This form of representing price data has become very popular in recent years.  It is an approach that is thought to date back to the 18th century, amongst Japanese rice traders. It was only in the 1990s that these charts started becoming much more popular amongst Western traders and investors, thanks to the publication of the book “Japanese Candlestick Charting Techniques” by Steve Nison.


First of all, the basics. Let’s take a look at how a candlestick is actually constructed. If you are familiar with the concept of bar charts for market analysis it uses the same price data (but if not don’t worry – I will assume no knowledge and start from the ground up).

In any particular time period – and for the purposes of this I am going to stick with daily data – there are four separate points of price information: the high for the day, the low for the day, where the market opened and of course where it closed. Traditionally this would be represented by bar charts, an example of which is shown below….

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