Charting the price of stocks, cryptocurrencies, and other types of tradable commodities is done every single day, all around the world through candlestick charts. Candlesticks are helpful because they show the people who look at them a lot of useful information very quickly. Originating centuries ago, these charts help simplify the complexity of market movements, providing traders with a clear visualization of price action. The price action is then used by traders and investors to find patterns and decide when to buy, sell, and how to approach the market. 

The History of Candlestick Charts

The origins of candlestick charting can be traced back to 18th century Japan, where a rice trader named Munehisa Homma first developed what we think of now as candlesticks. Homma was an intelligent trader who recognized the importance of understanding the psychology and sentiment that drives the market. He began recording daily rice prices, marking the open, high, low, and closing prices... which is still what is shown on candlestick charts today.

This new price charting approach allowed him to visualize price movements over time, making it easier to predict future what might happen in the future based on patterns that had happened in the past. This method proved so effective that it was widely adopted among Japanese merchants and traders. Candlestick charting remained relatively unknown outside of Japan until the late 20th century when Western traders and analysts, such as Steve Nison, brought this tradition to West.

Understanding Candlestick Charts

Candlestick charts display changes in price over a specific time period using individual "candlesticks." Each candlestick is a visual representation of four separate data points:

1. Open Price: The price at which the asset started trading during the time period.
2. Close Price: The price at which the asset finished trading during the time period.
3. High Price: The highest price traded during the time period.
4. Low Price: The lowest price traded during the time period.

Candlesticks consist of a "body" and "wicks". The body is created by the range between the open and closing prices, and the wicks extend from the body to show the high and low prices of the time period.

Bullish Candlestick: When the closing price is higher than the opening price, the body is typically a green or white color, and shows an overall increase in the price during that time period.

Bearish Candlestick: When the closing price is lower than the opening price, the body is typically a red or black color, and shows an overall decrease in the price during that time period

Interpreting Candlestick Patterns

The true power of candlestick charts comes through more than just individual data points. It comes when a bunch of individual candlesticks are put together over time. When price is charted over time, the candlesticks can form patterns that investors and traders use to create assumptions about what might happen in the future. 

There are all sorts of both short-term patterns created by candlesticks such as bearish or bullish engulfing candlesticks as well as longer-term trends that will form over a period of a few weeks, a few months, or even over years. By learning to understand and read these trends and patterns, investors and traders are able to approach the markets with more wisdom and have a good reason to take specific trades. For example, this stock is in an uptrend that has lasted for about 3 months so far:
 

Using Candlesticks in Modern Trading
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Traders around the world now use candlestick charts every day to help them make wiser, more intelligent trading decisions. By analyzing patterns and trends, traders can gauge market sentiment and predict potential future movement. Here are a few ways that traders might use candlesticks to help them make better trading decisions: 

1. Technical Analysis: Traders look for specific candlestick patterns that they recognize to identify potential entry and exit points. For example, a trader might enter a long (bullish) position when a bullish engulfing pattern appears, especially after a pull back to a support line in an up-trending stock.

2. Market Sentiment: Candlesticks can provide insights into the overall sentiment or mood of the market. A series of larger-than-normal bullish candlesticks indicates strong positive sentiment, while a series of bearish candlesticks suggests more a more negative mood.

3. Risk Management: Candlestick patterns help traders set stop-loss alerts or order and target-profit levels. For example, if a trader identifies a nice up-trend, they might set a stop-loss order just below the pattern so that if the stock moves down instead of up, they limit their losses to an acceptable level. 

4. Confirmation With Secondary Indicators: While candlestick patterns are powerful on their own, traders often use them in conjunction with other indicators, such as exponential moving averages or trading volume, to help them set up their trades.

In Conclusion

​​Candlesticks are a powerful way that traders and investors have been charting and understanding markets for hundreds of years. By understanding the basics of candlestick patterns and how they can quickly convey the sentiment of the market, traders can better understand the movements of the stock market. The truth is that trading and investing is not impossible for most people, and with tools like candlestick charts, understanding how to get started can become fairly simple. 
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​Happy Trading!
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​P.S. I don't know if you noticed, but the picture of the chart in that nice up-trend also has a stop-loss order and a target-profit level shown. In fact, those are set up as automatic orders, so if the stock reaches one of those levels, my position will automatically be closed. With tools like stop losses and automatic orders, trades that I take can often become set-and-forget types of things... so I only spend a few minutes each day actually looking at the market while my trades automatically work for me.