Candles are the orthodox way that stocks are looked at. Unlike Close lines, candles encompass a sense of volatility.
History
Legendary Japanese rice merchant Munehisa Homma (1724-1803) made a fortune by appreciating the psychology behind rice trading dynamics during the Tokugawa Era. Whether Homma invented candlesticks as a visual tool is unclear. Homma did lay foundations philosophically: conceptualizing the ideas of open, close, high, low, and bid-ask spread. Homma wrote the first book on market psychology: The Fountain of Gold. Homma identified and chronicled chart patterns that are the backbone of technical analysis.
Homma’s ideas were refined in Japan, where the candlestick used today established its classic form. Later, in the 1880s, American journalist Charles Henry Dow (1851-1902), the first editor of the Wall Street Journal, created an ersatz line bar to depict open, close, high, and low. Dow’s ideas about market dynamics were crude compared to Japanese comprehension.
British financial analyst Michael Feeny and American financial analyst Steve Nison independently learned of candlesticks while working in Japan. They introduced them to Westerners in the late 1980s. Within a decade, the Japanese candlestick became the standard chart representation.
Formation
Candles, also called bars, are created by mathematical bundling in some way. Bars may be delineated by time (duration), ticks (trades), or shares (volume).
A time chart forms a bar over a set duration, such as seconds. Time charts do not reflect trade activity.
A tick chart forms a bar over trades. A tick is a trade with an associated volume (order size). Price may move or not from a tick.
A tick is agnostic to time and volume, tallying only trades. Tick bars are a better measure of trade activity than time bars, but are inferior to more strictly volume-based share bars.
A volume chart forms a bar over shares traded. A volume bar may be considered a refinement of a tick bar.
Tick bars package trades. In doing so, they have a considerable volume range, as order sizes may differ by orders of magnitude, albeit averaging out somewhat.
A share bar has within it, at the very least, the number of shares specified. Some bars pack more because of the same large order size issue that tick bars face. But share bars have less variance than tick bars. Hence, share bars are the most accurate representation of trade behavior. Hence, volume charts are the mainstay for minuting.
The quantum level for minuting is 1200 shares per bar. A 1200-share bar is roughly equivalent to a 6-tick bar. This quantum-level resolution is ideal to reveal microstructure and geometric minuting patterns. A smaller volume bar would fragment microstructure. Bars at 1,600 shares (8 ticks) blur microstructure, and are on the cusp of showing mesostructure.
Volume Bar Formation
There is no standard for how volume (share) bars are to be packaged. MultiCharts and TradeStation differ in how volume bars are made.
TradeStation treats trades as indivisible, whereas MultiCharts treats the designated bar size as the fixed quantity. Everything else can be identical, including the feed, the trades and the prices, and the resulting share bars still differ because of that single rule.
TradeStation keeps every trade whole. For a 1200-share bar, the bar closes on the trade that reaches 1200 shares, taking all of it, so a bar might hold far more than 1200 shares. As such, a TradeStation share bar is often not much different from an equivalent tick bar.
By contrast, MultiCharts fills a bar with the designated shares and carries the remainder of the trade into the following bars. That makes a MultiCharts share bar a more accurate representation of volume than a TradeStation share bar.
One upshot is that you will see more doji in MultiCharts than TradeStation, which tends to tuck flat-price doji into its fatter bars.
Another consequence is that several Cockpit signals will differ somewhat between MultiCharts and TradeStation, as most of Cockpit depends on bar formation. This includes volume, tape speed, and state.
As order book spread and size is independent of bars, the order book signals are least affected, though they may diverge after large trades in how quickly flow and balance respond, as those signals take the printed tape into account. In quiet trading, the order book readings mostly agree.
In sum, Cockpit is sometimes a bit more responsive in MultiCharts than in TradeStation.
Data
A candle is comprised of a body and possibly a wick. A candle tells 4 price statistics: Open, Close, High, and Low. The Open is price at the first tick of the bar, the Close the last tick price. The High is the highest price of the bar and the Low the lowest. A bar with an Open below its Close is green, to indicate that the price went up in the making of the candle. Conversely, a bar with the Open above the Close is red, to show that the price dropped.
A candle body that is just a thin line happens when the price was the same at the Open and Close. Such a scant candle is called a doji.
A candle shows only instant price. This makes a candle an incomplete picture of what went into the bar. The missing element is volume. The VoX overlay tells how volume affected bar formation. Visage furthers conveying price action by painting bars as chop, drift, or trend.
Visage and VoX comprise PryPri. PryPri overlays deepen perspective and provide context. PryPri is integral to minuting, as it clarifies apt entry and exit levels.
Shapes & Patterns
Here are some candle shapes and patterns that are helpful to know for minuting.
Bearish versus Bullish
The relative vertical shape of candles, including the wick, indicates how bullish or bearish a bar is. You might say that bar shape shows sentiment, except that executing software algorithms is decidedly not sentimental, and stocks now move more by software than by sentimental men.
The more wick there is that runs counter to a trend, the weaker that trend is. So, for example, a weakening bull has a small candle at the bottom of a long wick, as shown in the bullish image at the far right. Conversely, a belittled bear would have a short candle on top of a long wick, as the close is much higher than the low.
Engulfing Bar
An engulfing bar is one that completely engulfs its predecessor. An engulfing bar of the opposite vector – red versus green – signals a reversal.
Pin Bar
A pin bar has a small body and a long wick. A pin bar appears with price rejection: the price vector met resistance. The long wick (or tail) is the visual evidence of price rejection. It means price briefly moved to an extreme (high or low), but then snapped back, closing near the open. This snapback suggests that the vector mojo is unsustainable: that level was tested and rejected.
The wick of a pin bar is often at least 3 times the length of the candle. The longer the wick relative to the body, the more significant the price rejection might be.
The position of the pin bar is more telling than whether it is green or red. A bullish pin bar, called a hammer, has its body near the top with a long wick below, whereas a bearish pin bar, called a shooting star, has the body near the bottom. A pin bar may signal a revback.
The term pin bar is short for Pinocchio bar, referencing the idea that the price action is lying about its direction: just like Pinocchio’s nose grew longer when he lied.
A bullish pin bar in a downtrend suggests sellers tried to push the price lower but failed; buyers may take control. A bearish pin bar in an uptrend suggests buyers tried to push the price higher but were rejected; sellers may take over. Hence, a pin bar may signal a revback.
Context matters with pin bars: they are more reliable an indicator when they form at a support or resistance level as part of a strong trend.
Doji
A doji is a pause in price movement. A doji is a flat line bar, showing that the stock opened and closed at the same price. There may be wicks above and/or below the line bar. If a doji appears at the end of a trend, it hints that the trend is exhausted. VoX on a doji shows the inclination when price does move.
Harami
Harami is a 2-bar pattern, with candles of opposite colors, that signals trend exhaustion. A large mother candle is followed by a smaller baby candle. The Japanese word harami means pregnant.
A bullish harami, shown at left in the above figure, is significant during a downtrend. It indicates that selling pressure is weakening, and that a potential bottom is forming.
Conversely, a bearish hamari, 2nd from left in the figure, appears in an uptrend to indicate that buying momentum is fading and a potential top may be near.
A hamari cross has a thin pin bar or doji as the baby. A hamari cross is stronger than a hamari in its statement that a trend is likely coming to an end.
Unlike an engulfing bar, where the 2nd candle overtakes the 1st, harami is more subtle in suggesting exhaustion or pause rather than dramatic reversal.
Tweezer
A tweezer has 2 bars of similar size but opposite bodies (opposing price vectors): one bullish, the other bearish. Like a pin bar, a tweezer represents price rejection: a key level was tested twice – either high or low – and failed to break through both times.
A tweezer top occurs after an uptrend. The 2 candles have matching highs. The 1st candle pushes up but the 2nd fails to exceed that high and reverses. The high was rejected: a bearish signal.
A tweezer bottom occurs after a downtrend. The 2 candles have matching lows. The 1st candle drops but the 2nd fails to break lower and reverses. The low was rejected: a bullish signal.
A tweezer shows momentum waning and a price level being defended. A tweezer may signal a turning point, especially if it aligns with a prior sticking point or is otherwise supported by PriPri. A tweezer near a session high or low, especially after the 1st hour of the regular session, may be especially telling.
Stars
The Morning Star and Evening Star are 3-candle patterns that appear at the end of a trend, indicating reversal. Whereas the Morning Star is bullish, the Evening Star is bearish.
The 1st candle is the last testament of a dying trend: down for Morning, up for Evening. The 2nd candle is a pin bar of either color, regardless of the star pattern, or may be a doji. This 2nd bar states that the trend is over. The 3rd candle confirms that proclamation by going markedly in the opposite vector of the 1st candle: up for Morning, down for Evening.