How candles will help you be not fooled by news anchors and data! – Part 1

How can a scented lavender candle help you do that. Well you see that’s not the candle I’m talking about. What you’ll learn below is what a Japanese candlestick is. Why it is used to represent data and How you can convey 5x more data in the same graph.

Humans are by design visual learners. So complex or large sets of data is often represented in a visual form like Bar Charts, Graphs, Bubbles etc . A sample graph is like the one below which plots speed vs time, quite simple right.

If you’ve seen one of the below graphs, usually in movies about wall street or the business channels and wondered what financial mumbo-jumbo that exactly is? Then you’re in for a surprise.

They’re called Japanese Candlesticks and are very simple to understand and by the end of the blog post. You’ll be able to not only read and understand but make your life simpler by making some of your own.

History of Candlesticks:

Now different data is represented in different ways and one of the most efficient ways to represent financial data of the stock market is Candlestick charts.
Use of candlesticks in it’s most primitive form began in the 1600s by Japanese rice traders. Much of the development of candlestick charting to a Japanese rice trader named Homma in the 1850s.While it was Steve Nison who popularized them in the west. They’re called so because they look like bodies of colored candles with a wick sticking out of it.

They came up with it as an efficient system to represent data about rice traded in the marketplace that day. Like the highest/Lowest price at which the rice was sold or what was the price in the morning or afternoon.
Instead of a single data point like a line chart it makes of 4 data points plus color(or lack thereof) to convey information.

Candlestick Construction:

Lets start with something familiar. Below isA line chart that represents beard growth over the course of 5 days.

Now that’s quite simple right it displays that when I measured the beard length for that particular day like it was 5mm on day 1, 9mm on day 2 and so on.So beard length has changed over the course of the week since it grows and I trim it. Although from the line chart I only know one length per day let’s say what the length was at the end of the day.

From this chart you maybe tempted to conclude the person has a shabby grooming routine and hence beard length in general has increased over the 5 days. We also know that hair grows, so that might have changed over the course of the day. Now since we have this line chart that displays data that is absolutely inconsequential in your life, The question arises how can we display 5x of such stuff in the same space using candlesticks?

The answer is Japanese candle sticks.
Candlesticks have 4 distinct data points the Open(start), Close(end), High and Low. It also makes use of the color to signify if it opened or closed lower but that redundancy is for visual efficiency and faster interpretation. Here’s a candle chart displaying the same data as the previous line chart:

We can see from the candle that Day 1 started at a high point 7mm and ended at 5mm so we’ll color this candlestick RED to signifyin one glance that over the day the length has decreased.In case the value had increased(Day 2) the candle is colored green to provide contrast and easy comparison and understanding. Other combinations instead of green-red would be White-Blue, White-Black, Green-Hollow and some more. When the Open and Close are the same value(Day 5) there is no colored body formed.

Looking at candles over the 5 days now we understand that 4 out of 5 days the beard length was decreasing. Presumably because I was trimming it each day and creating that day’s low.We can thus make the interpretation that I have the daily habit of trimming my beard and a decent grooming routine this conclusion cannot have been made using just the line chart.

Candles show so much more data that compared to the line chart which gave us only 5 data points this chart gives us 25 data points! It can also be understood in the same time it takes to understand the line chart. Even without looking in details. The ability to interpret this data at a glance makes it so powerful. It is like being able to read a 250 page book by reading the first 50. Like being able to watch 3 seasons of GOT but know the entire 8 without spending that much time. It’s like having the power of the NZT48 pill from the movie limitless without the hangovers.

Together the candles also tell us that over the course of the week, the length of the beard on Day 1 morning(open) was 7mm, on Day 5 Evening (close) it was 8 mm, and that over the course of the week the beard length varied to a high of 14mm and lowest it was about 3mm. It was not Even possible to display the open, High and Low data in an easily understandable, efficient way using the line charts it’s only through the candles that we get all of that. Hence it is also used to track stock prices, their movement throughout the entire day is displayed as such.

That was easy to read. To be able to understand candlesticks and later to reap maximum benefit of this new skill you acquired you need to know how it’s constructed from OHLC or corresponding Line charts. That will enable you to make money, understand loads of data in a very short time and impress your old relatives so that they make sure they include you in their will (because you’re smarter).

What happened is you’ve just learnt a new alphabet system(OHLC) and if you spend 5 more minutes reading the next part of this of this you’ll be able to speak a completely different language. The language used for stock prices, forex, crypto even show you better representation of data of the recent COVID-19 coronavirus. The next part is coming up soon. If you want us to notify you about when the post is up and get the Exclusive Excel sheet I used to generate the above line and bar charts and experiment on your own, Like making a chart of your Instagram followers throughout the day,consider subscribing to the newsletter using the block below this post. Do post your questions in the comments. Share if you found this valuable