In the 1700s, a Japanese man named Munehisa Homma, a trader in the futures market, discovered that although there was a link between the price, the supply and the demand of rice, the markets were strongly influenced by the emotions of traders. He understood that when emotions played into the equation, a vast difference between the value and the price of rice occurred.
This difference between the value and the price is as applicable to stocks today as it was to rice in Japan centuries ago. The principles established by Homma are the basis for the candlestick chart analysis, which is used to measure market emotions surrounding a stock.
There are two colours that you will see when looking at a candlestick chart. Green candles, which indicate that the price of the share is increasing and red candles, which indicate that the price of the share is falling.
Each candle represents a specific amount of time and contains important information for traders. When looking at a 1hr chart, each candle represents 1hr of trading information. The same applies to a 5min chart etc.
Now that you know what a candlestick is, you need to see what a candlestick chart looks like. The purpose of a candlestick chart is to give you all the information you need, in a visual format. The great thing about trading with candlesticks is that you get used to their layout and information representation very quickly.
The chart below is a daily time frame chart of the EURUSD which means that each candle represents one day of trading data. So by simply looking at one candle, I can tell what the opening price of the day was, the closing price, the highest price that was traded and the lowest price that was traded that day.
You should recall a movie called The Matrix. Well I suppose that depends on how old I am, hmmm. I often get a picture in my mind of where Neo begins to see everything around him consist of numbers, where he can read and use them to his advantage. Candlestick charts contain all the numbers and figures that are significant in the financial world. All we need to do is become like Neo and see them clearly.