Technical Analysis - a Brief BackgroundTechnical analysis is simply the study of prices as reflected onprice charts. Technical analysis assumes that current prices shouldrepresent all known information about the markets. Prices not onlyreflect intrinsic facts, they also represent human emotion and thepervasive mass psychology and mood of the moment. Prices are, in theend, a function of supply and demand. However, on a moment to momentbasis, human emotions.fear, greed, panic, hysteria, elation, etc. alsodramatically effect prices. Markets may move based upon people'sexpectations, not necessarily facts. A market "technician" attempts todisregard the emotional component of trading by making his decisionsbased upon chart formations, assuming that prices reflect both factsand emotion.
Standard bar charts are commonly used to convey price activityinto an easily readable chart. Usually four elements make up a barchart, the Open, High, Low, and Close for the trading session/timeperiod. A price bar can represent any time frame the user wishes, from1 minute to 1 month. The total vertical length/height of the barrepresents the entire trading range for the period. The top of the barrepresents the highest price of the period, and the bottom of the barrepresents the lowest price of the period. The Open is represented by asmall dash to the left of the bar, and the Close for the session is asmall dash to the right of the bar. Below is a standard bar chartexample.
Candlestick Charts ExplainedYou may be asking yourself, "If I can already use bar charts to view prices, then why do I need another type of chart?"The answer to this question may not seem obvious, but aftergoing through the following candlestick chart explanations andexamples, you will surely see value in the different perspectivecandlesticks bring to the table. In my opinion, they are much morevisually appealing, and convey the price information in a quicker,easier manner.
What is the History of Candlestick Charts?
Candlestick charts are on record as being the oldest type ofcharts used for price prediction. They date back to the 1700's, whenthey were used for predicting rice prices. In fact, during this era inJapan, Munehisa Homma become a legendary rice trader and gained a hugefortune using candlestick analysis. He is said to have executed over100 consecutive winning trades!
The candlesticks themselves and the formations they shape weregive colorful names by the Japanese traders. Due in part to themilitary environment of the Japanese feudal system during this era,candlestick formations developed names such as "counter attack lines"and the "advancing three soldiers". Just as skill, strategy, andpsychology are important in battle, so too are they important elementswhen in the midst of trading battle.