It's hard to believe that Japanese candlestick charts were almost completely unknown in the West, before being introduced in 1989 by a American called Steve Nison in his book entitled Japanese Candle Charting Techniques. These techniques are now so widely used throughout the financial industry, it is hard to imagine a world without them. What is unique is that a simple candle shape can hold so much information, but because it is graphically and colourfully displayed it allows the mind to absorb information very quickly. Combined with our knowledge of volume, they provide the two elements that will form the basis of your trading. As you will have guessed they are called candles or candlesticks because that is what they look like!



Each Candlestick has FOUR elements as follows, namely an opening price, a low price, a high price and a closing price within the time frame being considered. Where the price has closed up in the time period then these are generally coloured blue, and where the price has closed down they are generally show as red. The reason they are so powerful is because they show instantly and visually the price movements over a certain period. As you will learn later, all aspects of the candle are important, but particularly the size of the body, the length of the wicks ( upper and lower ) and of course whether it is an up or down candle.

Now that you understand the basic formation of a candlestick I am going to discuss timescales in a little more detail. It may surprise you to know that on my currency trading charts I have the following timescales : 5 seconds, 10 seconds, 30 seconds, 1 minute, 5 min, 10 min, 15 min,30 min and onwards to the monthly. The reason I mention it now is firstly to make you aware that you can have candlestick charts in virtually any timeframe you like ( all charting packages are slightly different ), and secondly if you are not careful, you will spend your time like some lost soul endless flicking between timeframes to try to look for confirmation of something you have seen in another timeframe!. Don't worry, everyone has the same problem when they start, it is part of human nature! Every form of trading has different requirements and in addition this also depends on the length of time you are going to be holding positions open. Let me try to give a silly example, which I hope will make the point.

As I mentioned it above, take the 5 second charts as an example. Imagine you were buying shares as part of your investment portfolio for the next few years. You would not base your decision on a 5 second chart would you! ( no you wouldn't!! - really you wouldn't) The timescale of your holding and the timescale of chart you are looking at are completely out of balance with one another. You would look at a daily, weekly or even monthly chart going back several years. The timescales are relevant to one another and you must base your decision on a relevant chart for the time you are likely to be holding the trade.

Now let's look at another trade using the 5 second chart. In currency trading you have people who trade by what's called scalping. In the currency markets the prices move around constantly and sometimes very fast indeed. In a few seconds a price may have moved several points. A scalper will trade large amounts of money on small movements, trading in and out of the markets several hundred times a day. There would be little point looking at an hourly or daily chart. Trading would be over by the time you pushed the button. A silly example I know, but I hope you get the point. Scalpers would use anything between 10 second and 5 minutes, and in case you're wondering, no I am not a scalper nor do I ever look at these timescales. My trades are longer term hours, days and sometimes weeks, so I use hourly and daily charts 95% of the time ( much less stressful)

Finally, let my try to give you four generalizations for the candles themselves ( I'll call them candles from now on as it it less typing!) which I hope will give you some very basic guidance. Remember there are whole books and websites dedicated to the study and analysis of candle charts and you will have to do lots of reading, study and practice to become expert, but in general the following are true:

1. The longer the body of the candle then the more meaningful the move & the more volume( effort) required.

2. It takes effort to go down as well as up so 1 applies whether it is an up or a down candle.

3. The longer the wick on the candle ( top or bottom ) then the more one can interpret from the candle.

4. When a candle has the open and close price very close together this represents indecision in the market.

5. The same candle can mean different things depending on where it appears in the overall chart

6. You never act on one candle alone, but wait for confirmation in the next few bars.

Now whatever time frame you are trading, you must wait for confirmation. If you are trading shares and are using a daily chart, wait for 2-3 days and see what happens. If you see confirmation then you can open your trade, depending on whether you are trading long or short.

Finally, remember that candlestick analysis is an art not a science, and can be applied to any financial instrument in any time frame. It takes many months and years of practice to interpret them correctly, but once learnt they provide the most powerful analysis of future price movement available. Combine them with a western indicator such as volume, and you start to be able to read the market and correctly predict future price movements.