What is a candlestick chart?
A candlestick chart (also referred to as Japanese candlestick chart) is a style of technical analysis chart popular with traders and used to display price movements of a financial instrument such as securities, derivatives or currency. Each “candlestick” represents a period which is set by the user depending on their style of trading.
Like the popular OHLC charts, candlestick charts also require the same open, high, low and close price data to draw them for the period you wish to display, however it is believed by many that candle stick charts help to give an easy to interpret visual representation of the price action.
The origins of reading candlesticks for trading originated in Japan in the 17th century when they began using technical analysis to trade rice. With the introduction of computers and charting software the use of candlestick charts has gained huge popularity with technical analysts, especially among foreign exchange traders, and is now commonplace with chartists.
How to read candlestick charts
At the basis of technical analysis, and candlestick charting, is the principal that “all known information is reflected in the price” and that buyers & sellers move markets based on their expectations and emotions. Many Forex traders have learnt how to read candlestick charts and apply them to their trading.
The hollow or filled/colored portion of the candlestick is called the “body” and the thin lines above and below the body represent the high/low range and are called “shadows” (also referred to as “wicks” or “tails”).
The high price is marked by the top of the upper shadow and the low price by the bottom of the lower shadow. If the financial instrument closes higher than its opening price, a hollow (or sometimes green) candlestick body is drawn with the bottom of the body representing the open price and the top of the body representing the close price. If the instrument closes lower than its opening price, a filled (or sometimes red) candlestick is drawn with the top of the body representing the open price and the bottom of the body representing the close price.