Candlestick or candlestick chart is a type of financial price chart used to describe the high, low, open, and close prices of an asset over a specific period of time.
Key details
- Candlestick or Japanese candlestick charts display four important pieces of information about the price of a security over a given period of time (high, low, open, and close).
- They are used in technical analysis and are a way for traders to analyze potential price movements based on historical patterns.
- Candlestick charts are among the most widely used by retail traders and can be applied to all financial instruments.
What is the candlestick chart?
A candlestick chart, also known as a Japanese candlestick chart, is a type of chart used in technical analysis in which the price of is represented by showing the opening, closing, maximum and minimum price of each session in what is known as candle.
Candlestick charts began to be used in Japan in the 17th century, which is why they are known as Japanese candlesticks, although it is believed that they began to be used in the way we know them today during the Meiji period in the 19th century.
Japanese candlestick charts are widely used today in the West in virtually any stock market due to their versatility and ease of visual reading.
Candlestick charts are made up of one candlestick for each session. The candle can be black (red) indicating that the price has fallen during the session or white (green) indicating that the price has risen during the session. Each candlestick is made up of a body and a shadow. The body is a rectangle that informs about the range from the opening price to the closing price and the shadow is a line that crosses the body and shows the high and low of the session.
It is a financial graph that shows specific information about the price of a security during a predefined period of time. Japanese candlesticks show the high, low, open, and close prices of the security. Each candle represents a period of time chosen by the trader. These time periods can range from 1 minute to 1 year or more.
Candlestick charts are made up of one candlestick for each session. The candle can be black (red) indicating that the price has fallen during the session or white (green) indicating that the price has risen during the session. Each candlestick is made up of a body and a shadow. The body is a rectangle that informs about the range from the opening price to the closing price and the shadow is a line that crosses the body and shows the high and low of the session.
Candlestick charts are preferred by most traders and are commonly used as part of technical analysis and day trading strategies. They are graphical illustrations of price movements and work in a similar way to many other charts. The vertical “y” axis represents price and the horizontal “x” axis represents time.
A candlestick chart is shown on the left in the image below. The chart has been set on the daily time frame, which means that each candlestick represents a full day of trading activity. On the right we have a bullish and a bearish candlestick with the key information they show.
- The long rectangle between the open and close price is known as the body. It means the trading range of the instrument during a specific period of time.
- This is the price at which the candle opened. A new open price is displayed each time a new candle is printed according to the time frame.
- This is the price at which the candle closed. A new closing price is displayed each time a new candle is printed according to the time frame.
- The highest price reached during the time period is shown by an upper wick. Wicks are often used when analyzing Japanese candlestick patterns.
- The lowest price reached during the time period is shown with a lower wick. The size of a wick is an important tool during technical price analysis.
Candlestick chart patterns
Traders using candlestick charts can use historical information to determine future price movements. One way to do this is by analyzing candlestick patterns. There are many patterns, from single candlesticks to multiple candlesticks, and we have listed a few of the main ones below.
- Pin bar. This is a single candlestick pattern and is used as a way to identify turning points or market reversals. They have small bodies and long wicks, and resemble the shape of a pin. They are sometimes called hammers or shooting stars.
- This is another single candlestick pattern and is a way for traders to identify price uncertainty. They resemble a plus sign and have a small body where the open and close prices are almost equal.
- An engulfing pattern requires two candlesticks to be identified. It is a way of analyzing market turning points and is usually found at the end of a trend. The first candle is usually small-bodied, followed by a larger one that engulfs it (its body is larger than the previous candle's high and low).
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