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Japanese Candlestick Patterns

Candlestick analysis denotes a particular type of technical analysis derived from price information gleaned from a candlestick chart of a particular security. This type of analysis is quite popular because of the fact that there is a significant amount of trend information hidden in a candlestick chart. Before we examine some of these trends, we will quickly overview what a candlestick chart looks like.

The basic chart is comprised of many candlesticks spaced over specified time intervals. The candlesticks themselves represent the range of prices that the particular security takes in those particular time periods.

Let us turn to the actual specifics of what the candlestick diagrams represent. The candlestick is comprised of a body that constitutes the opening and closing prices for the security during that particular period. Protruding from the top and bottom of the body are the wicks that represent the top and bottom prices for the trading period. If the security closes the period at a higher closing price, the body is white, whereas, when the opposite is true, the body is shaded black.

This charting method allows investors to see a lot more pertinent return information in a smaller amount of space. In addition, the shading pattern gives the investor a qualitative visual signal to quickly determine whether the instrument is trending up or down. We will now move on to two types of well-known candlestick trends used by investors.

The long lower shadow trend is one wherein the lower wick is quite large. This trend denotes a bullish market for the security. For this trend to be reliable, the lower wick must be at least as long as the body.

The long upper shadow is one wherein the upper wick is quite large. This trend denotes a bearish market for the security. For this trend to hold weight, the upper wick must be at least as long as the body.

The real benefit that candlestick analysis provides is the ability to perform shorter-term trend analysis of high and low prices in response to opening and closing prices. Candlesticks, as has been mentioned, portion the investment horizon into bite-sized periods, each with its own opening price. The high and low prices serve as a means for investors to gauge how markets responded to that initial opening price, either by bidding the price either up or down.

In order to make a rational investment, one would want to pool together candlestick data from several investment periods. As is the case with most types of analysis, investment trends are most rigorously predicted the more data one uses in order to come to a particular trend conclusion. Thus, one would not only want to use candlestick data from over several periods, but one would also want to see whether particular candlestick trends hold up over several periods or whether they tend to vacillate. The more consistency there is among one’s trends, the more likely those trends are to continue.