Although candlestick charts are nearly identical to typical Western bar charts, there is one important distinction: candlestick charts are far more dramatic in their presentation. Instead of the standard high-to-low vertical lines accompanied by horizontal ticks that identify the day's open and close, candlestick charts employ two-dimensional bodies to depict the open-to-close trading range and upper and lower stems (or shadows) to mark the day's high and low.
For over a century, the Far Eastern traders have used candlestick charts to track market activity. With the huge set of market data, Eastern analysts have identified a number of patterns that, with differing degrees of reliability, may accurately determine the future short-term trend for a particular investment.
These patterns (or indicators) are the premise for successful candlestick chart analysis. The theory, tested over the decades, is that candlestick charts can be effective in revealing the psychology of the market at a certain point in time. On occasion, a chart for a specific investment may meet the criterion for a candlestick indicator. These are the events investors are most interested in as they can decode the emotion surrounding an investment.
Knowing this means that for short-term, an investor can make confident decisions about buying, selling, or holding an investment.
Analysis based on trends in market psychology has its roots in Japanese rice trading in the 1700's. One of the most famous traders of the day, a man named Homma, discovered that studying the emotions of a market could be very useful in determining future trends.
Although it is not known whether Homma can be credited with developing candlestick charts as we know them today, it is under the same principles that led to their evolution and wide-spread acceptance among Eastern traders since the late 1800's. Candlestick charts have been a commonly practiced analysis technique ever since, and it is quite clear that Eastern traders have long given great weight to how market psychology effects future trading.
Candlestick charts have only recently been introduced to Western traders with much thanks to Gregory L. Morris and Steve Nison. However, since the early 90's its support has been captivating. The word has spread.
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