What Is a Candlestick Chart?

What Is a Candlestick Chart?

Candlestick is a financial chart, usually used to show the price trend of currency, securities or derivatives. It looks like a candle with a vertical rectangle, with a wick at each end and bottom. The top and bottom of the candle display the opening and closing prices respectively. The top of the wick shows the highest price, and the bottom of the wick shows the lowest price.

The candle diagram has existed since the 18th century and was invented by a Japanese named Benjian. He realized that there was a connection between rice prices, supply and demand, and the sentiments of rice merchants. He developed a chart in which each candle represents one of the four dimensions of a trading session - the opening price, the highest price, the closing price, and the lowest price. A hundred years later, the West caught up with him, and the rest became history.

These charts show market fluctuations and trends and are an important tool for investors and traders who wish to conduct a comprehensive analysis before investing. Technical analysis using candlesticks plays a key role in any trader's plan, which determines the entry and exit timing of the transaction.

Entity,——representing the opening to closing range

Shadow—— which indicates the highest and lowest price in a day

color,——revealing the direction of market movements - green ( or white ) entities indicate price increases and red ( or black ) entities indicate price decreases

Over time—— a single candle diagram will form a shape, and traders can use these shapes to identify the main support and resistance positions. Many candlestick patterns indicate that there are opportunities in the market - some candlestick patterns can provide insight into the balance between buying and selling pressures, while some candlestick patterns can identify persistent patterns or market hesitation.

What Do Candlesticks Tell Us?

Candlestick chart can reveal more than the price changes over time. Experienced traders will look for patterns to judge market sentiment and predict the market's next moves. Here is some of the information they are looking for :

For example, a long wick at the bottom of a candle may mean that traders buy assets when prices fall, which may be a good indicator that assets are rising.

- However, the long wick at the top of the candle may indicate that traders are seeking to profit off the knot - heralding a possible large-scale sell-off in the near future.

If the subject occupies almost the entire part of the candle, and the shadow lines on both sides are very short ( or there is no visible shadow line ), it may indicate a strong bullish sentiment ( green candle ) or a strong bearish sentiment ( red candle ).

Understanding the meaning of candlesticks in specific asset or market conditions is an element of technical analysis trading strategies - investors try to use past price movements to identify trends and potential future opportunities.

How to Read “One-Candle Signals”

Traders who trade in a very short time frame sometimes only focus on one candle. Familiarity with these ' one candle signal ' may be a useful exercise for beginners. In the image below, you will find four common candle signals :

1.The longer upper line may indicate a bearish trend, which means that investors are looking to sell and make a profit. The longer the upper shadow line, the stronger the index.

2.The longer lower line may indicate bullish signals, indicating that investors are seeking to buy, thus pushing up prices. The longer the shadow line is, the more reliable the signal is.

3.Cross star candle has no entity, because the opening price and closing price are the same. Cross stars can usually be interpreted as market hesitation and may herald an impending price reversal. ( Why is it called ' cross star '? Candles were first used by Japanese rice traders in the 18th century. The meaning of ' cross star ' is ' wrong ' - presumably because the price opening price and closing price are not common in the same position. )

4.There is an obvious long shadow line at the bottom of the umbrella. The red umbrella shape is also called hammer shape. When you see a hammer shape, it usually means that the asset is going through some serious buying action - and prices may rise soon. Green umbrellas, on the other hand, have an ominous nickname: the hanging line. They usually signal that sellers are ready to cash out - and thus reverse the upward cycle.

Six Bullish Candlestick Patterns

The bullish form may be formed after the market declines, indicating that the price trend is reversed. This type of form can be used as an indicator for traders to consider opening multiple positions to profit from any rising trend.

Hammer

The hammer line shape is composed of a short entity and a long shadow line, which usually appears at the bottom of the falling trend. The length of the shadow line should be at least twice the length of the entity.

The hammer line shows that despite the intraday selling pressure, the strong buying eventually pushed prices back. The color of the entity may be different, but the green hammer line can reflect the bullish signal better than the red hammer line.

The next day must be bullish to confirm this reversal pattern.

Inverted Hammer

The inverted hammer line is another form of weak bullish signal. The only difference between the two is that the upper shadow line of the inverted hammer is longer, at least twice the length of the entity, and the lower shadow line is shorter.

It shows that the purchase pressure appears first and then the selling pressure, but the selling pressure is not enough to lower the market price. The inverted hammer line indicates that buyers may soon control the market, but this form is not very reliable.

Bullish Engulfing

The bullish phagocytic form is composed of two K lines. The first K-line is a shorter red K-line, which is completely swallowed by a larger green K-line.

Though the second day opens lower than the first, the bullish market pushes the price up, culminating in an obvious win for buyers.

Piercing line

The piercing line is also a two-candlestick pattern, made up of a long red candle, followed by a long green candle.

There is usually a significant gap down between the first candlestick‘s closing price, and the green candlestick’s opening. It indicates a strong buying pressure, as the price is pushed up to or above the mid-price of the previous day.

Confirmation is seen by a further bullish candle.

Morning star

The morning star candlestick pattern is considered a sign of hope in a bleak market downtrend. It is a three-candlestick pattern: one short-bodied candle between a long red and a long green candle. Traditionally, the ‘star’ will have no overlap with the longer bodies, as the market gaps both on open and close.

It signals that the selling pressure of the first day is subsiding, and a bullish reversal is on the horizon.

Three White Soldiers

The three white soldiers pattern occurs over three days. It consists of consecutive long green (or white) candles with small shadows, which open and close progressively higher than the previous day.

It is a very strong bullish signal that occurs after a downtrend, and shows a steady advance amid buying pressure.

Charts Similar to Candlestick Charts

Box diagram

The box line diagram is composed of a box with a horizontal whisker line; it shows the distribution of data containing outliers, which can be used for a variety of data. For example, in psychology, a box plot shows the upper and lower limits of a person's intelligence quotient ( IQ ) ( at the end of the whisker line ) when everything is going well or not. Then, the box can display the actual IQ range based on the test.

The scope of the candle chart is relatively narrow, with only four components ( opening price, closing price, highest price and lowest price ), while the box line chart ( also known as box-and-whisker chart ) shows outliers, upper and lower limits, medians, and the first quartile and the third quartile. These charts can be used to display a variety of different types of data; although they look similar, their uses are very different.

Bar chart

The bar chart is one of the most basic charts. It can display the same information as the K-line chart, but in different ways. The visual effect of the bar chart is poor and more difficult to understand. The thickness of the K-line graph entity highlights the difference between the closing price and the opening price.

Whether to use a K-line graph or a bar graph depends on the required information. If the opening price and the closing price are the most important, the K-line chart is the best choice. If all parameters are equally important, the bar chart is best suited to display this data.