Introduction to Candlestick Charts
Whether you are a bear or a bull, there is something for everybody when it comes to studying charts to inform future trading decisions.
Candlesticks are a popular charting analysis technique, and in this issue of Bullseye Insight we provide a beginner's guide to candlesticks and how they can be interpreted to guide future trading decisions.
Just like a bar chart, an individual candlestick shows the market's open, close, high and low price for a given asset on a given day.
Each candlestick has a “body" which represents the price range between the open and close of that day's trading. When the candle’s body is coloured red, it means the close was lower than the open. If the body is green, it means the close was higher than the open.
Just above and below the body are "wicks". The wicks show the high and low prices of that day's trading. If the upper wick on a red candle is short, it indicates that the open that day was near the high of the day. A short upper wick on a green body indicates that the close was near the high. The relationship between the day's open and close, high and low, determines the look of the daily candlestick.
Taken together, the body and wick of each candle provides a simple yet effective means of visualising the range of market price movements during a trading day. Taking multiple candles across consecutive trading days can also provide greater insight into the market sentiment towards an asset and allows traders to predict future price movements.
Did you know?
Candlestick charts originated in Japan over 100 years before the West developed the bar chart. In the 1700s, a Japanese man named Homma discovered that, while there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders. Candlesticks show that emotion by visually representing the size of price moves with different colours.
Bulls vs. Bears: shining a light on market sentiment
Candlesticks are created by movements in the market price over a period of time. Typically candlestick charts are daily - meaning each candlestick represents the price movement during one trading day. However, candlestick charts can also be monitored intra-day, for example hourly, or over longer periods. The choice of time period is completely the choice of the trader and depends on their trading or investing time horizons.
To the frustration and bemusement of many, price movements may sometimes appear random. However, to those that employ this type of technical analysis charts form patterns that can be used for short-term trading purposes. Patterns are typically categorised as either bullish or bearish.
Bullish patterns indicate that the price is likely to rise, while bearish patterns indicate that the price is likely to fall. No pattern is a guaranteed signal, as candlestick patterns represent tendencies in price movement, not guarantees.