A while back, Jerome responded with a question to my post, "My Top 5 Favorite Candlestick Patterns". He asked...
So, if they are my favorites, why not paint them green & red?
Jerome, this is a great question. It's also a question I happen to get a lot so I thought I would address it in a post of it's own.
A lot of people do prefer to "paint" their candles green and red. As for me, I have chosen to stick with Black & White. In and of itself there's not a massive difference. I just happen to be more of a purist and choose to stick with the more traditional colors.
I'll explain my logic but let's start by taking a look at what an identical chart would look like Black & White, vs. Green and Red.
As you can see, the only real difference here is the "white" candles are colored green and the "black" candles are colored red. At first glance, this is a simple adjustment and not one to be thought about twice. A lot of people like the colors, so they choose green and red. If that works for you then great!
When I look at that chart I don't see green replacing white and red replacing black, I see a bunch of "all solid" candles, some of which happen to be green, and some of which happen to be red.
The error is made by people who do not have a history with traditional candles. They erroneously assume that the candles are actually drawn White and Black. But this is actually not true.
A white candle is technically an "open" candle. It is drawn on a chart and there is no color filled in behind it. A black candle is technically a "solid" candle. It is drawn on a chart and the candle is "filled in".
Since most charting software is setup to draw on a white background, the candles come out looking black and white. In fact, we usually, more often than not, refer to the open candle as a white candle as it is more descript than "open". Plus the terminology "open" could get confused with the "opening price", so it just makes the most sense to call it by the color as we see it.
A better name would probably be to call it a "bullish" candle, as that is in fact what it represents. The bulls pushed the trade further and the candle has a higher close than open, thus a bullish (white) candle.
Originally white and black worked great. This is how charting software drew the candles, this is how the Japanese drew the candles - all was well.
Until the advent of really awesome computer monitors that could display vivid colors.
When colors took over, people started adding color to everything. Then one day someone realized that staring at white stock charts on a computer screen all day hurt their eyes, and they switched to a black background for the chart.
The remedy was simple - add color. Naturally a lot of people gravitated to Green for bullish candles and Red for bearish candles.
If all candlestick knowledge ended here, the solid green and red images would be fine. But it doesn't...
Every trader knows that the trend is the most profitable part of a move. Right?
So a lot of traders and computer programmers have worked to program their charts to indicate when a trend is bullish vs bearish. Then they have the chart change colors based on the trend direction.
Guess what color they use?
Take for example this Adaptive Moving Average created by Perry Kaufmann.
Notice during a bullish trend all of the candles (open and solid) turn green. And notice during a bearish move all of the candles (open and solid) turn red. And notice when the trade is neutral, the candles all return to black and white.
For a trader like myself, who has worked with many of these systems, simply translating candles to red or green isn't good enough. I'm already used to reading red and green candles in indicators like this Adaptive Moving Average.
When I see red and green candles, all drawn solid, my subconscious brain immediately revolts! It thinks "these are all bearish candles"! I can not really explain the mental gymnastics my brain does. It literally throws me for a loop. It's like putting a Mac operating system on a windows computer... it just doesn't work!
So Jerome, the answer to your question, why I don't draw candles with Red and Green, is because my brain gets confused!
Now let's also be clear - I like colors. In fact, I prefer colors. Many websites and charting softwares implement color very effectively in their candle charts, and they do it while preserving the integrity of the candlestick. Look at these examples:
All of these examples are a fine implementation of candles as they preserve the integrity of the open and solid candles while adding the nice benefit of color beyond black and white.
The other part of the question Jerome asked about is translating a candle chart to a bar chart.
This is very simple Jerome. Both candles and traditional bar charts are built on the OHLC (Open, High, Low, Close) prices. If you wish to see how a candle would look as a bar, you just need to draw the candle's OHLC out as a bar.
Remember, bars are always drawn from left to right, so you can take several candles and translate them if you want to. Take an evening star reversal for example, it would look like this:
Of course doing this by hand is tedious, and frankly a waste of time. I suggest you just use your charting software to switch between traditional bar charts and candlestick charts.
So there you have it, Jerome! I hope you understand now why we choose to draw our candles as black and white candles. It has more to do with tradition and adapting to what we are used to more than anything else.
Do you have a question you'd like me to answer about Candlestick patterns? Feel free to send us an email to firstname.lastname@example.org, or leave a comment on the blog and we will answer your question!