3.1- Outlook

We have already recognized that the Open, high (H), low(L), and close are the best ways to summarise trading activity for a given period. A charting technique should make this information easily understandable. Charts can become quite complicated if they are not properly charted. Each trading day contains four data points (i.e. The OHLC. For a 10-day chart to be visualised, 40 data points must be visible (1-day x 4 points per day). You can see how difficult it would be to visualize data for 6 months or 1 year.

You may have noticed that the usual charts we are used to, such as the area chart, column chart, and pie chart, do not work for technical analysis. Technical analysis is not possible with these charts. This is the only exception.

Regular charts are not useful because they only display one data point at once. Technical Analysis requires that four data points be displayed simultaneously.

Here are some examples of chart types:

1. Line chart
2. Bar Chart
3. Japanese Candlestick

This module will focus on Japanese Candlesticks. However, before we get into candlesticks we will explain why we don’t use the bar and line charts.

3.2 - Line & Bar charts

The Line chart is the basic one.It uses one data point to create the chart. A line chart can be used for technical analysis by plotting the closing prices of stocks or an index. Each closing price is marked with a dot, and then a line connects all the dots.

When we have 60-day data, the line chart can be created by connecting the closing prices for 60 days. (IMAGE
 

Line charts can be plotted at different time periods, such as monthly, weekly, hourly, etc. If you want to create a weekly line graph, you can use weekly closing securities prices and other time frames.

The simplicity of the line chart is what makes it so appealing. The line chart is easy to read and traders can see the general trend in security. The drawback of the line chart is its simplicity. The line chart provides analysts with a visual representation of the trend but does not give any further detail. The line chart only takes into account closing prices and ignores the high and low. Traders do not like to use line charts.

The bar chart is the opposite.It is more flexible. A bar chart shows all four price variables: open (high), low (low), and close. There are mainly three components to a bar.

1. The central line - The highest security price is indicated by the top of the bar. The lowest price for the same period is indicated at the bottom of the bar.
2. The open is indicated by the tick/left mark.
3. The close is indicated by the tick/mark.

As an example, let's say that the OHLC data of a stock is as follows:

Open - 65
High - 70
Low - 60
Close to 68

The bar chart for the data above would look something like this:

You can see that we can plot four price points in one bar. We will display 5 vertical bars if you want to see a 5-day chart. And so on.
(IMAGE).
 

The market's movement for that day will affect the position of the bars on the chart.

The left mark, which is the opening price, should be lower than the right. This indicates that the close will be higher than the open (close>open), thus a positive day in the markets. Consider this example: O = 46; H = 51; L = 45; C = 49. The blue color of the bar indicates that it is a bullish day.
(IMAGE).
 

The same applies to the right mark. If it is higher than its left counterpart, it means that the close is less than the open.

(IMAGE).
 

The range for the day is indicated by the length of the central lines. The difference between the high or low can be described as a range. The difference between high and low decides the range. A longer line means that it is wider. A shorter line means that it is smaller.

Although the bar chart shows all four data points, it lacks visual appeal. This is the main drawback of a bar graph. Bar charts make it difficult to see potential patterns that are brewing. Complexity increases when traders have to look at multiple charts throughout the day.

Bar charts are not used by traders. It is important to mention that some traders prefer bar charts. If you're just starting out, Japanese Candlesticks are a great choice. The majority of traders use candlesticks as their default choice.

3.3 - The Japanese Candlestick History

Before we dive in, it's worth taking a moment to learn about the history of Japanese Candlesticks. The candlesticks are Japanese, as the name implies. Candlesticks were first used in the 18th century when a Japanese rice merchant named Homma Munehisa introduced them.

Although candlesticks are a well-known method of price analysis in Japan for many years, western traders didn't know much about them. In 1980, a trader named Steve Nison discovered candlesticks and introduced them to the rest. His book, "Japanese Candlestick Charting Techniques", was the first-ever to be published on candlesticks. It is still a favorite among traders.

The majority of the candlesticks patterns still have Japanese names. This gives technical analysis an oriental feel.

3.4 - Candlestick Survey

In a bar chart, the open and close prices are indicated by ticks on the left and right sides respectively. However, in a candlestick, the open/close prices are indicated by a rectangle body.

A candlestick chart can classify candles as bullish or bearish. Usually, the candles are represented by red/black candles and blue/green/white candles. The technical analysis software allows for the customization of the colors to any color you choose. This module chose the blue-red combination to represent bullish candles and bearish candles.

Let's take a look at the bullish candle. Like a bar chart or candlestick, it is composed of three components.

1. The Central real body – The rectangular connection between the closing and opening price is called the central real body.
2. Upper shadow - Connects to the high point and the close.
3. Lower Shadow - Connects to the open from the low point.

Take a look at this image to see how a bullish candlestick looks like.
(IMAGE).
 

To understand this let us go with an example and take the following prices.

Open = 62
High = 70
Low = 58
Close = 67
(IMAGE).
 

The bearish candle has three components, too.

1. The Central real body – The rectangular real body that connects the closing and opening prices. The opening is located at the top, while the closing is at its bottom.
2. Upper shadow - Connects to the open from the high point.
3. Lower Shadow - Connects to the Low point and the end.

This is what a bearish candle looks like:
(IMAGE).
 

The best way to understand this is an example. Let's take the following prices.

Open = 456
High = 470
Low = 420
Close = 435
(IMAGE).
 

This is an exercise that will help you better understand the candlestick pattern. You can plot the candlesticks using the data.
 

It is much easier to read the candlesticks and identify patterns once you have absorbed the process of candlestick plotting.If you have any difficulties with this exercise, please post your question in the comments section at the end.

If you plot the candlestick charts on a time series, this is what they look like. The blue candle signifies bullishness, while the red indicates bearishness.
(IMAGE).
 

A long-bodied candle indicates strong selling or buying activity. A shorter-bodied candle indicates less trading activity, and therefore less price movement.

In summary, candlesticks are much easier to understand than the bar chart. Candlesticks make it easy to visualize the relationship between open and closed, and high and low prices.

3.5 - Time Frame's Note

A timeframe is a duration that one spends studying a chart. These are some of the most popular time frames technical analysts use:

• Monthly Charts
• Weekly charts
• Charts for the End of the Day or Daily
• Intraday charts – 30 mins, 15 minutes and 5 minutes

You can choose the time period that you require. A high-frequency trader might prefer a 1-minute chart over any other timeframe.

Here's a quick overview of different time frames.

The table shows that the timeframe reduces and the number of data points (candles) increase. You need to decide the time frame that you require based on your trader type.

Data can be either information or noise. You must filter out noise when trading. A long-term investor would be better to look at monthly or weekly charts, as these will provide more information. An intraday trader who executes 1-2 trades per day is better in looking for the end-of-the-day, or at most 15 minutes charts. For high-frequency traders, 1-minute charts can provide a lot of information.

You need to decide on a time period based on your trading philosophy. This is crucial to your trading success. A successful trader will look for the information and ignore the noise.

Key points:

1. Technical analysis cannot be done with a conventional chart type because we must plot 4 data points simultaneously.
2. While a line chart can be used for trend interpretation, it cannot be used for any other information.
3. Bar charts are not visually appealing and it is difficult to identify patterns. Bar charts aren't very popular because of this.
4. There are two types: the Bullish candle or the Bearish candle. However, the structure of the candlestick is the same.
5. If it is close to open, it is a Bullish candle. If it is close to open, it is a Bearish candle.
6. Trading success is determined by the time frames. This must be chosen carefully.
7. As the frequency increases, so does the number of candles.
8. Traders should be able to separate relevant information from noise.