If you have ever seen the screen of a stockbroker, you have probably seen charts that look like small red and green candles. This is called Japanese Candlesticks, and it is the most popular way to read price movements in the world.
"There is always a light in the dark for those who know where to look."
— Florence Scovel Shinn
The method was invented by the Japanese rice trader Munehisa Homma in the 18th century. He discovered that while the price of rice was governed by supply and demand, the market was hugely influenced by the emotions of the merchants. The candlesticks were designed to display these emotions visually.
The anatomy of a candle
How to read them: The thick part of the candle (the body) shows the difference between the opening price and the closing price. If the closing price is higher than the opening, the candle is green. The lines sticking out at the top and bottom are called wicks or shadows, and show the absolute top and bottom price during the day.
Patterns to look for
- Hammer: A small candle with a long wick pointing down. Means the sellers tried to push the price down, but buyers took control. Often a signal that the bottom is reached.
- Shooting Star: A small candle with a long wick pointing up. Buyers gave up, and sellers took control. Often a signal that the top is reached.