Types of Charts
The simplest is the basic line chart which we see in the newspaper each day. Generally, these use only the closing price for the day, week or month as a representative sample of the time period being looked at. With daily charts, the closing price also carries increased significance as this is the settlement price which has to be paid at the end of each trading day for the parcel of shares or contracts.
The next extension is to add in the missing data. That is the opening price, and the period’s high and low. The high and low are linked with a line to show the daily range with a tag on the left to show where the market opened and a tag on the right to indicate the close. These bars can help build a much clearer picture of where the moods and temperament changes are taking place.
Back in the 1700’s, there was a very successful trader in the rice markets of Japan who developed a system of drawing the day’s market action in a way similar to bars except that he added emphasis by closing in the range between the open and the closing prices. While he still included the range outside the open and the close, which he called shadows, he said that they had little significance.
To make the chart more visually useful he filled in the box of the body on days where the price closed lower than it opened (Down days) while leaving only the outline if the closing price was above the open. (Up days)
The real value of candlestick charting is that it makes moves very visual and both the rice traders and traders today still notice that certain configurations of candles generally lead to specific market action. Sometimes this means a continuation with increased vigor or a reversal of price.