Candlestick charts are a method of reflecting price dynamics that have become widespread among modern traders.
Invented by Japanese rice traders in the 19th century, candlestick charts are a hybrid of a line chart and bars. Each candlestick represents a time interval over which the dynamics of an asset are tracked. A candlestick consists of a body and lines, that are called shadows, above and below the body of the candlestick.
The candlestick chart is a type of chart used in stock market technical analysis to represent the variations of a price. The analysis of a candlestick chart over a past period is supposed to give indications of the future price.
The body represents the difference in prices between the beginning and the end of the time frame (opening and closing prices). The strokes at the top and bottom of the body represent the highest and lowest price for the selected period. Candlesticks are colored differently, depending on whether the movement is upward (closing price higher than the opening price) or downward (closing price lower than the opening price) during the time interval in question.
Despite the simplicity of candlestick types, there are also more complex cases. Years of observation of candlestick charts have allowed traders to note certain signals consisting of two, three or more candles. However, as a rule, most of the most famous combinations contain 2-3 candles. Such patterns include dark cloud veil, bullish absorption, tasuki breaks, three black crows, stepped bottom, abandoned baby and many others.
Normally bullish candlesticks are colored white and bearish candlesticks are colored black, but now traders can set up their own colors on trading platforms.
Normally, if you see on the chart long white/green candlesticks, that means, the buying pressure is really strong and the price is bullish. But it is also important to pay attention to the stock market structure context. When the candlestick is red/black and is quite long, it can be assumed that the price is bearish as this kind of candlestick illustrates selling pressure.
The candlesticks reflect not only the price, but also its volatility. The reasons why the price was volatile will be found out later, when everything is over. That's why traders keep track of the days when there is an unexpectedly large price swing in a security. As a rule, at this point the trading volume rises sharply and then falls.
The candlestick chart is the most informative type of chart, displaying price lows and highs within a specific time frame. It is considered the most visually informative also because it shows the sentiment present in the market in a particular timeframe.
Candlestick charts serve as a visual aid for making decisions to commit stock, foreign exchange, commodities and option trading. By looking at a candlestick chart, you can determine the opening and closing prices of an asset, the highs and lows, and the total range for a particular time period. Candlestick charts serve as the cornerstone for technical analysts. For example, when a bar is white and high relative to other time periods, it means that buyers are set to go higher. The opposite is true for the black bar.