J.C. Parets and Japanese Candlesticks

One of my favorite aspects of using technical analysis is just how much information we can get in a simple chart. We can use line charts, bar charts, or even Japanese candlesticks. Each have their own pros and cons, but they all provide insight into how the market is behaving, no matter what your individual time frame may be.

One of the main reasons I love candlestick charts is actually the history behind them. Did you know that this form of charting has been around since the 1700's? Invented by a man named Homma Munehisa who worked in the rice paddies in Japan, he would go into the rice markets every day to sell his product. He began to track the price of rice throughout the day (high, low, open, close) and when he returned home, he would literally chart the data. And voila, we have what are know by current technicians as "candlesticks". In fact, there are some legends that claim he established a personal network of men, spread out by a specific distance, to communicate market prices.

In this video, All Star Charts' J.C. Parets discusses Japanese candlesticks and how he personally uses them in his analysis.

First, here are basic examples of the three different types:

Since J.C. is specifically covering Japaense Candlesticks in this video, he goes on to describe the different aspects of a candlestick and what they are actually telling us. As you can see in the picture below, there is certainly a lot of information given in each individual candle.                         

The "shadows", both upper and lower, tell us the full trading range for the period. This is the highest price and the lowest price the security traded at. The "Real Body" tells us the difference between the opening price and the closing price. If the candle is hollow (such as the candle on the left), that means the closing price was higher than the opening price. On the other hand, if the candle is filled (like the candle on the right), that means the closing price was lower than the opening price.

Adding some color, we can also tell how price performed relative to the day previous period (day, week, month, etc.). If the candle is green, this means the closing price was higher than the previous period's closing price. If the candle is red, the closing price for the current session is lower than the previous close.

Thus, one would think that "green days are hollow and red days are filled". However, this isn't always the case. Sometimes, price can gap down, rally upwards for the full period being monitored, and still close below the previous close. In these cases, we get a hollow red candle. Of course, given this info, we can also correctly assume that there are green candles that are filled. In the opposite format, these are occasions when price may gap up, fall all day, but still close above the previous session's close. Here is an example below from Facebook (FB) when we saw these two unique candles on back-to-back days:

In conclusion, I think that Japanese Candlesticks provide very valuable information that may not show up on a line chart or a bar chart. They allow us to the see the intra-session behavior, and not simply the closing price, as we would see on a line chart. Learning how to correctly interpret what these candles are telling us is something that all traders and investors should have in their personal "tool belt" of skills in order to become successful.