Candlestick Charts

As a new trader, trying to read the charts to find the perfect stock or currency pair may not be as easy as you thought. You may have come across weird candle-like structures dancing on the charts and you have no clue how this thing works. In this article, we will be discussing all the details you need to know to understand the Candlestick Charts (aka Japanese Candlestick).

Japanese Candlesticks are a technical analysis tool that traders use to analyze the price movement of securities(stocks). The concept of candlestick charting was developed by Munehisa Homma, a Japanese rice trader. During routine trading, Homma discovered that the rice market was influenced by the emotions of traders, while still acknowledging the effect of demand and supply on the price of rice. A Candlestick Chart shows more information than line charts.

Consider the two charts:

The line charts are a very simple way of representing the movement of price. It displays the information with a simple line using a series of data points. While the candle charts show more information with every single stick. That is the reason traders prefer candlestick charts

Each Candlestick shows Open, Close, Low, High price. Candles have two colors Green and Red. When the closing price is above/greater than the opening price it makes a green candle showing an increase in price also known as Bullish Candlestick, and when the closing price is below/lower than the opening price it makes a red candle showing a decrease in price also known as Bearish Candlestick. However, the colors of these candles can vary according to your trading platform. The words bullish and bearish are used to show the sentiment of the trader, if you think the price of the stock will go up then you have a bullish sentiment and you will be referred to as a Bull. Similarly, if you think the price of the stock will go down then you have a bearish sentiment and you will be referred to as a Bear. The price of the stock is dependent on the number of bulls and bears. If there are more Bulls(buyers) than Bears(sellers) the price will go up and vice versa.

Each Japanese candlestick represents a specific time frame. If the time period is set for 30 minutes, then each individual candle will take 30 minutes to form.  The wicks at the top and the bottom of the candlestick show the highest and lowest price reached during that 30 mins period. A chart that displays the open, high, low and close price for a given period is referred to as an OHLC chart.

Now let's take a closer look at a candle. The candlestick in this illustration is a period of 1 day, which means that the candle took an entire day to form.

From the candle you can identify the following information:

• The candle is bearish because of its red color. This means that over the course of a single day the price of the stock dropped. There were more sellers than buyers throughout the day; the price was lower at the close of the day than when it opened.

• The price at the beginning of the day opened at 1.38278.

• The price at the end of the day closed at 1.34497.

• Throughout the day, the highest price that the buyers pushed the stock to was 1.38600.

• Throughout the day, the lowest price that the sellers pushed the stock to was 1.34125.

From the candle you can identify the following information:

• The candle is bullish because it is green. This means that over the course of an entire day, the price of the stock increased. There were more buyers than sellers throughout the day; the price was higher at the closing of the day than when it opened.

• The price at the beginning of the day opened at 1.3016.

• The price at the end of the day closed at 1.3175.

• Throughout the course, the highest price that the buyers pushed the stock to was 1.3185.

• Throughout the day, the lowest price that the sellers pushed the stock to was 1.2956.

These candles took one day to form, it gives the sentiment of the stock of one full day. At what price the stock open, close, what was the highest and lowest price it reached the entire day. However, if yo

u want more detailed chart, you should set the charts to lower time frames.

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Summary

So far, you have learned that:

• The Japanese candlestick chart shows you more information than a simple line chart.

• The Japanese candlestick chart is the most common type of chart used by traders

• Japanese candlesticks represent the time that the candle takes to form, which is referred to as a time frame.

• Each candlestick tells you the open, high, low, and close (OHLC) price of the time frame for that candle.

• A red candle means that the price has moved down and a green candle means that the price has moved up.