| History of Candlesticks |
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In the 18th century a wealthy Japanese businessman, Munehisa Homma (a.k.a. Sakata) developed a technical analysis method to analyze the price of rice contracts. Today this technique is called candlestick charting and is widely used when drawing stock charts. Sakata began trading at the local rice exchange around 1750. He kept records of the market psychology learning to boost his profits by carefully monitoring prices and not to rushing into trades. Sakata is regarded as the Grandfather of candlesticks.
Candlestick charts use the same price data as bar charts (open, high, low, close). However, candlestick charts are drawn in a much more visually identifiable way typically resembling a candle with wicks on both ends. The high and low are described as shadows and plotted as a single line. Learning how to read candlestick charts is easy. The price range between the open and close is plotted as a rectangle on the single line. If the close is above the open, the body of the rectangle is white. If the close of the day is below the open, the body of the rectangle is red. At HotCandlestick.com we use red to represent blood as in Sakata's references to the battle between the buyers and sellers being analogous to wars waged in ancient Japanese times. More recently in the Western world we refer to the war between bulls and bears. When the bears are winning the war sometimes we hear analysts talk about blood on the street.  Japanese candlestick analysis is a tool that offers a glimmer into the psychology of short term trading activity. This tool can be powerful when used in combination with other technical analysis tools. Steve Nison, Father of candlesticks and author of popular candlestick charting books such as Strategies for Profiting with Japanese Candlestick Charts and Beyond Candlesticks: New Japanese Charting Techniques Revealed is widely credited with bringing candlestick charting to the Western world from Japan in 1989 when he published his first article on candlestick analysis in Futures magazine. Many authors of candlestick charting books have greatly contributed to the knowledge base and popularity of candlesticks. As reference material this web site uses some of the basic concepts of candlestick charting found in many of their works including books like Beyond Candlesticks: New Japanese Charting Techniques Revealed by Steve Nison and Candlestick Charting Explained: Timeless Techniques for Trading Stocks and Futures by Gregory L. Morris. |
| Candles in a new light |
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Since 2001 HotCandlestick.com, LLC has been offering subscribers of our premium service a view through the window of candlestick chart analysis. There are over 1,000,000 individual occurrences of candle patterns identified on the daily charts of the 10,000+ securities tracked by HotCandlestick.com, LLC. Subscribers can quickly find patterns that have historically worked well for individual securities. HotCandlestick.com, LLC developed a scoring system for candlestick patterns by combining statistical analysis with some classical technical analysis of individual securities. Click here to view the candlestick patterns tracked by HotCandlestick.com, LLC.
The strength of a candlestick pattern was developed by HotCandlestick.com, LLC to give an indication of how closely the pattern resembles the text book definition of a particular pattern. A positive strength value indicates a pattern that is found in the correct recent price trend according to the text book definition of the pattern. A negative strength value indicates a pattern that is not found in the correct recent price trend. The magnitude of the strength value correlates to the strength of the recent price trend and number of individual candlesticks making up the pattern. 
HotCandlestick.com, LLC, also developed the score of a candlestick pattern. The HotCandlestick scoring system is a statistical approach to quantify the reward to risk ratio for individual securities. Stocks are prone to a variety of market forces, technical and fundamental. As day trading became popular in the 1990's stocks became even more susceptible to wild price swings based almost purely on technical forces such as breaking a 50-day moving average or through a head and shoulders chart pattern. With large variation in stock prices within and between stocks the owners of HotCandlestick developed a scoring system which accounts for this variation. The SCORE measures the past success of a given candlestick pattern for a particular security. Criteria are set such that a stock must have at least 5 instances of a particular candlestick pattern before appearing in this database. The SCORE formula uses the standard deviation of the actual % gains for each of the 5 days following the candle signal. Scoring allows for easy identification of patterns that have worked well for individual stocks by ranking the % gains achieved based on how consistently those gains were achieved. The formula used to calculate the SCORE of a candlestick pattern for a given security is: Variables: n = 1st, 2nd, 3rd, 4th, 5th x = n Day Median Gain for the given security and candle pattern y = Standard Deviation of all n Day Median Gains z1 = Count of the candle pattern found for the given security over the entire date range of the database z2 = Count of the candle pattern found over the entire date range of the database Score for Individual Securities found at bottom (pink text) on the "Search Databases" page: n Day Score for Individual Securities = [(x * sqrt(z1)) / (y * y)] * 1000 Score for Individual Candle Patterns found in white section at top of the "Search Databases" page: n Day Score for Individual Candle Patterns = [(x * sqrt(z2)) / (y * y)] * 1000 To find which LONG (BUY then SELL) positions worked well in the past you should look for high positive SCORE values. High positive SCORE values represents a high reward to risk ratio for LONG positions. Conversely, to find which SHORT (SELL then BUY) positions worked well in the past you should look for large negative SCORE values. Large negative SCORE values represents a high reward to risk ratio for SHORT positions. For example, A higher positive SCORE value would appear for a stock with the following 1st day percent gains (+5%, +4%, +7%) than another stock with the following 1st day % gains (-12%, +10%, +5%). At HotCandlestick.com, LLC we will continue to hone our statistical approaches used to marry classical technical analysis with candlestick charting techniques. |
Any specific investment or investment service contained or referred to in this web site may not be suitable for all visitors to this site. An investment in stocks may mean investors may lose an amount even greater than their original investment. Anyone wishing to invest or speculate in the stock market should seek their own financial or professional advice. HotCandlestick.com, LLC is not an investment advisory service and does not recommend the purchase or sale of stocks. There are no licensed financial advisors working at HotCandlestick.com, LLC. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING SYSTEM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. THE RISK OF LOSS IN TRADING STOCKS CAN BE SUBSTANTIAL. Stock trading is speculative and a substantial risk of loss exists. Past performance is not necessarily indicative of future results. |