What Is a Candlestick?

A candlestick is simply a form of price chart used in technical analysis in the financial market that shows price movement during a given time period. Candlesticks were designed hundreds of years ago by Japanese rice merchants and traders to follow market prices and daily momentum before becoming popular and are now used to represent and read financial market trends. The candlestick graph illustrates high, low, open, and closing prices over a specified time period. Candlesticks are used by traders to read price trends. There are minute, hourly, daily, weekly, monthly, and yearly candlesticks that illustrate the high, low, open, and closing prices for that time period.

The candlestick's wick displays the high and low of the minute, hour, day, week, month, or year as well as how they compare to the open and close of that period. The shape of the candlestick changes depending on the relationship between the time-frame high, low, opening, and closing prices. A candlestick chart displays all of the important data a trader needs to read, analyze and predict price movement. Candlestick charts are used to measure market sentiment in the pattern of bullish vs bearish movement. These patterns give the trader different information about the market, the trader then analyzes this information and predicts the market trend either for the short term or the long term.

Candlestick Component

1. Wick (shadow)

The wick, also known as the shadow, is an important component of the candlestick. Its objective is to display the price extremes for a given time period. The wick is graphically thinner than the body and is used as an indicator for traders to show where there are extreme prices occurring as well as the direction of the price.

2. Open Price

In a candlestick, the opening price or open price is simply the first price you view for a particular time frame. There are now candle bodies that are per minute (1m-tf, 5m-tf, 15m tf), hourly, daily, weekly, monthly, and even yearly. If the price of stocks, forex, or cryptocurrency is trending upwards, a green candlestick opening indicates that the open price was found near the bottom, whereas red candles with openings near the top indicate that the price is trending downwards. White candles are sometimes used in place of green candles, and black candles in place of red candles. Although most cryptocurrency trading platforms prefer to use green and red candlesticks, some stock and forest trading platforms still use white and black candlesticks. The open price is an important component of the candlestick.

3. Close Price

In a candlestick, the close price or closing price is simply the last price you view for a particular time frame. This is the last price at the body of the candle that is traded before the next candlestick is formed. This all depends on the timeframe, that is per minute (1m-tf, 5m-tf, 15m tf), hourly, daily, weekly, monthly, and even yearly. The body represents the price range between the time frame of opening and closing prices. On the candlestick, the closing price is indicated by the top (green or white candlestick) or bottom (red or black candlestick) of the body. The close price is an important component of the candlestick.

4. High Price

In a candlestick, the high price is located at the top of the shadow and represents the highest price during the time frame. When there is no upper shadow, it means that the highest price traded was the close or open price. The shadow is also known as Wick.

5. Low Price

In a candlestick, the low price is located at the bottom of the shadow beneath the body. There will be no lower wick or shadow if the open or close was the lowest point.

Candlestick Anatomy

Bullish and Bearish Candles

Candles are either bullish or bearish depending on the price direction at the time they are drawn or generated.

Bullish Candlestick

A bullish candlestick is a candlestick that indicates a price uptrend within a timeframe, a bullish candlestick shows an increase in value for a particular commodity, stock, forex, or cryptocurrency. This candlestick indicates an increase in price over the specified time period. The green candlestick represents bullish movement, but the white candlestick is used as well.

A candlestick chart of many candlesticks is formed when the price of an asset is plotted over time using candlesticks.

The graph below is a 15-minute candlestick chart from CoinEx Exchange, with each candlestick representing a 15-minute period. The smaller the time frame, the more closely you examine the asset's price action.

15-minute candlestick chart from CoinEx Exchange

To plot candlestick charts in your technical analysis system or trading platform, you can use a variety of chart time frames or periods. The most typical is,

Bearish Candlestick

When the price opens at a certain level and closes at a lower level, a bearish candlestick forms. This candlestick represents a price decrease. The bearish Japanese candle is typically red, but black is also widely known. A bearish engulfing pattern is a technical chart pattern that indicates that lower prices are imminent. A long red body is followed by three small green bodies and another red body to form the bearish pattern. The green candles are all contained within the bearish bodies' range. It indicates to traders that the bulls lack the necessary strength to reverse the trend.

Candlestick Patterns

Candlesticks are made from prices, these prices are specifically open, close, high, and low. These prices form various shapes and variations known as candlesticks or candle patterns.

Doji Candlestick Pattern

In technical analysis, the doji is a common candlestick chart pattern. Doji candlesticks are mostly identified with the shape of a cross, an inverted cross, or a plus sign. Doji patterns are the simplest to identify because their opening and closing prices are so close. Doji is neutral pattern that appear in a variety of important patterns. Technical analysts believe that the price reflects all known information about the crypto, stock, or forex implying that the price is efficient.

Engulfing Candlestick Pattern

One of the most potent two-candlestick patterns is the Engulfing pattern. Engulfing pattern is formed when the second candlestick totally engulf (overshadows) the previous candlestick. This occurs when the second candlestick is much larger than the first candle stick in the two-candlestick pattern. Types of engulfing candlestick patterns:

1. Bullish Candlestick Pattern:

At the end of a downtrend, a bullish engulfing candlestick pattern occurs. At first glance, the bullish engulfing candlestick appears to perform quite well. It's known to have about a 63 percent reversal rate.

2. Bearish Candlestick Pattern:

A downward gap is created in bearish engulfing when the opening price for a trading day is lower than the closing price for the previous day's trade.

Hanging-man Candlestick Pattern

The Hanging Man is made up of only one candlestick, its legitimacy is proved by the surrounding candles. A Hanging Man candlestick is distinguished by its small body, little or no wick (upper shadow), and lower shadow. From a technical analysis standpoint, a hanging man pattern indicates a bearish reversal trend with selling pressure.

Summary

In summary, candlestick charts are now widely used to track, analyze, represent, and use for trading prices in financial markets. Cryptocurrencies, indices, forex, and the stock market are examples of these markets. Stocks and cryptocurrencies are the most commonly traded values in the financial market today. Candlestick charts record and graphically display the prices at which these instruments are traded. Candlestick charts are one of the most common and widely used price representation methods.