先人の跡をたどる
“If you wish to know the road, inquire of those who have travelled it.”
Data and charts fascinate me. I firmly believe and work daily towards building a better world through data. While alone, data may seem powerless; once you connect data, you can uncover powerful stories and help find solutions to solve the world's problems. I have been particularly interested in understanding the Japanese Candlestick charts for some time.
In this article, I share information based on Steve Nison's book, “Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East.”
I am actually still reading and understanding the book, but I thought it might be interesting to share the basic concept of a candlestick chart.
Candlestick charts are used mainly to predict price movements in financial markets. Predicting financial market prices go back to at least the 18th century. When we are discussing prices in a financial market there are four important aspects you need to understand how price works in a financial market.
First, to simplify things, let's say we have one company's shares trading in the stock market, then when the market opens, there is an opening price for that share, and when the market closes, there is a closing price of the share. These are two values that we can identify in a day. But there are two more values which we also need to consider, those are the highest price of the day and the lowest price of the day. Now, we essentially have four prices that we need to monitor on a given day for a given share. Lets recap
- Opening price
- Closing Price
- Highest Price
- Lowest Price
I was explaining this in the context of a trading day, but this idea can be extended to any time frame, let's say 1 hour. We can know the opening price of that 1 hour period, the closing price, the highest and the lowest price during that 1 hour period.
Do you feel the amount of data and insights we can generate related to price changes constantly in a market?
So, essentially what candlestick charts do is plot these four values. Let's look at an image to understand this.
The middle part is called the candle body, and the two lines on top and at the bottom are called candle wicks. As we discussed before we can see how the four price values are represented by the candlestick. Now, there is one more thing to add, this chart is a scenario where the closing price is higher than the opening price. But there also can be a scenario where the closing price is lower than the opening price in which case the candle would look a bit different. Let's look at an image
The true power of candlestick charts comes when we plot them as a time series, so if it's by each day, then we create one stick per day and plot sticks over a period of time, let's say a year. This allows us to analyse tremendous amounts of data as patterns and price movements in the markets. Also to make things more interesting, the body of the candlestick and be long or short based on the price gap, and the wicks and be long or short. It can have many combinations and patterns. All these represent price movements which intern reflect how people perceive the price of the share in the market.
To get started, I think this is enough for you. I hope next time you see candlestick charts on the internet, you would have a better understanding of what it represents and you would be interested to analyse them in-depth.
In my next publication, I will discuss more understanding patterns and uncovering hidden stories through those patterns of data.
Reference
Nison, S., 2001. Japanese candlestick charting techniques. New York: New York Institute of Finance.
