Chart is the most essential element for any technical analyst. There are various methods of plotting the charts. Candlestick charting is one of the most favored techniques for visual analysis. Candlestick charting was first developed by Japanese and hence the name Japanese Candlestick chart has become very famous.
As a matter of fact, this method of charting captured the attention of Wall Street traders much later. Japanese were using this technique for tracking the price movement of agricultural commodities. For all the practical purposes when a technical analyst refers to Candlestick charts, it essentially implies Japanese Candlestick chart.
Construction of Candlestick charts (refer drawing):
Like bar chart, construction of candlestick charts is also very easy. Let us try to understand how it is done.
- Each candlestick line represents the activity for a fixed period that could be an hour or a day or a week or a month. It shows the prices at opening, high price, low price and closing price. OHLC is a frequently used acronym for open high low close.
- Main body or real body is either filled in (black or red) or hollow (white or green) and
- It represents the price range between the opening and closing prices. Black and white colors were used as per the traditional methods when the charts were drawn manually. However, in most of the latest computer aided charting red and green colors are used.
- If the opening price is higher than the closing price then the main body is filled.
- If the closing price is higher than the opening price then the main body is hollow.
- The thin lines above and below the main body are called as shadows or wick. Shadows represent the high and low prices for the particular period.