Japanese candlesticks are a technical analysis tool that traders use to map and analyze the movement of securities prices. The concept of candlestick mapping was developed by Munehisa Homma, a Japanese rice trader.
History of the Japanese candlestick
In his trading routine, Homma discovered that the rice market was influenced by traders' emotions, while recognizing the effect of supply and demand on the price of rice.
Homma has developed candlesticks that graphically display the nature of price movements using different colors to indicate differences. Traders can use candlesticks to read and identify patterns of price developments and make decisions based on short-term price developments.
As a financial instruments legendary trader, Homma dominated the rice markets and became popular for discovering the candlestick mapping method. When the Japanese stock market began in the 1870s, local technical analysts incorporated Homma's candlestick methodology into the trading process. Japanese candlestick mapping is now a popular technical indicator that traders use to analyze financial markets.
How do Japanese candlesticks work?
Japanese candlesticks provide more detailed and precise information on price movements, compared to bar charts. They provide a graphical representation of the supply and demand behind the price action of each period.
Each candlestick has a central part that indicates the distance between the opening and the closing of the traded value, the area referred to as the body. The upper shadow is the price distance between the upper body and the top of the trading period. The lower shadow is the price distance between the lower body and the bottom of the trading period.
The closing price of the traded security determines whether the candlestick is up or down. The actual body is usually white if the candlestick closes at a higher price than the one it opened at. In such a case, the closing price is located at the top of the real body and the opening price at the bottom.
If the traded security closes at a lower price than it opened for the period, the body is usually filled, or black in color. The closing price is located at the bottom of the box and the opening price is at the top. Modern candlesticks are now replacing the black and white colors of the body with more colors, such as red, green, and blue. Merchants can choose from the colors when they use automated trading platforms.