In the 1700s, a Japanese man named Homma, a trader in the futures market, discovered that although there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders. He understood that when emotions played into the equation, a vast difference between the value and the price of rice occurred. This difference between the value and the price is as applicable to stocks today as it was to rice in Japan centuries ago. The principles established by Homma are the basis for the candlestick chart analysis, which is used to measure market emotions surrounding a stock. There are two colours that you will see when looking at a candlestick chart. Green candles, which indicate that the price of the share is increasing and red candles, which indicate that the price of the share is falling. Each candle represents a specific amount of time and contains important information for traders. When looking at a 1hr chart, each candle represents 1hr of trading information. The same applies to a 5min chart etc.
Skill, strategy and psychology are as important in developing a trading system in the market as they are in battle. Candlesticks and the shapes and formations were given military names by the Japanese traders, owing to the feudal environment during that time. Candlesticks developed names such as “counter attack lines” and the “advancing three soldiers”.
Candlesticks are used primarily to identify turning points in the market. To use candlesticks successfully we need to understand their composition and the patterns they generate