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Computerized Investing > July/August 2007

Introduction to Candlestick Charting

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by Wayne A. Thorp

Modern-day technical analysis is typically traced back to Charles Dow around the beginning of the 20th century. However, almost 300 years earlier, the Japanese were using similar techniques focusing on price behavior and patterns to trade rice contracts. Out of this came candlestick charts, which appeared in the second half of the 1800s. After hundreds of years of modification and refinement, candlestick charts are popular among day traders and buy-and-hold investors alike.

Like all forms of technical analysis, candlestick charting attempts to forecast the future price movements of a security by examining its past price behavior and the patterns that appear on a historical chart.

Here we will offer an overview of candlestick charts and highlight the significance of some different types of candlesticks. To illustrate our examples, we will use a few popular charting Web sites. For more information on Web sites offering candlestick charts, refer to the “Technical Analysis and Charting Web Sites” Comparison article in the March/April 2007 issue of Computerized Investing (available on-line at AAII.com).

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