What are Candlesticks?
Candlestick charts are a type of financial chart used to display the price movements of a security, currency, or commodity. Each "candlestick" typically represents the open, high, low, and close prices for a given time period (e.g. one day). The body of the candlestick represents the range between the open and close prices, with the "wick" or "shadow" above and below the body representing the high and low prices.
Candlestick charts are often used in technical analysis to identify patterns and make trading decisions. They are called candlesticks because a thicker body of the green or red bar shows the range of trade values, whereas the skinny “wick” portion shows a maximum or minimum value within the timeframe of that chart line.
In other words, the longer the thick part of the candlestick is, the higher the range of price movements, whereas, the shorter the candlestick, the smaller the range of price movements. Long skinny “wick” lines show a very extreme high or low price value. A short skinny “wick” line shows very small high or low values. If there is no wick, then the high or low price is within the range of values within that chart period.
Simplified Example
Let's say candlestick chart for “B Corp” is set to show 15 minute increments. This is a setting that the user can customize. The chart shows a green candlestick that appears to be about an inch long. Remember that this, too, is customizable because it anchors to the trading range during that 15 minute period of time. The price numbers on the right side of the chart show the bottom of the candle at $2.50 per share. The top of the candle shows $3.50 per share. This tells you that during this15 minutes of trading, the price range of B Corp was trading between $2.50-$3.50 per share.
Consider that the candle was green, showing that there was more pressure to buy than to sell during that time period. There was also a green “wick” on the candle that had a skinny green line that ran up to $4.00 per share during that time period. That means that someone paid as much as $4.00 per share during that 15 minute period.
Who Invented the Candlestick Chart?
Munehisa Homma, a Japanese rice trader from the 18th century, stands as a pioneering figure in the realm of financial markets and technical analysis. Homma's contribution lies in the creation of the candlestick chart, an innovative visual tool that revolutionized the way traders interpret and analyze market movements. His astute observations and meticulous record-keeping enabled him to develop a system that represented price fluctuations in the rice market through distinctive candlestick patterns, combining both technical and psychological aspects of trading. Homma's insights into market sentiment and the cyclical nature of price movements were foundational, setting the stage for modern technical analysis methodologies.
Homma's pioneering work with candlestick charts not only offered a systematic way to analyze market trends but also introduced the concept of using visual patterns to interpret market sentiment. His groundbreaking contributions laid the groundwork for the evolution of technical analysis, shaping the way traders navigate financial markets by providing a visual language that transcends time and continues to be a cornerstone of trading analysis in various financial instruments, including cryptocurrencies in today's digital age.
Examples
Bullish Candlestick: A bullish candlestick is a candlestick chart pattern that indicates a potential price increase in a particular security. It is characterized by a long green or white body, which represents the opening and closing price of the security. The body is surrounded by a thin line, called a wick or shadow, which represents the highest and lowest prices of the security during the trading session. For example, if the opening price of a stock is $100 and it closes at $110, with a high of $120 and a low of $95, the candlestick would have a long green or white body and a long lower wick. This indicates that the bulls were in control during the trading session, and there was a significant price increase.
Bearish Candlestick: A bearish candlestick is a candlestick chart pattern that indicates a potential price decrease in a particular security. It is characterized by a long red or black body, which represents the opening and closing price of the security. The body is surrounded by a thin line, called a wick or shadow, which represents the highest and lowest prices of the security during the trading session. For example, if the opening price of a stock is $100 and it closes at $90, with a high of $105 and a low of $85, the candlestick would have a long red or black body and a long upper wick. This indicates that the bears were in control during the trading session, and there was a significant price decrease.
Doji Candlestick: A doji candlestick is a candlestick chart pattern that indicates indecision in the market. It is characterized by a small body, which represents the opening and closing price of the security, and two long wicks, which represent the highest and lowest prices of the security during the trading session. For example, if the opening price of a stock is $100 and it closes at $100, with a high of $105 and a low of $95, the candlestick would have a small body and long wicks on both sides. This indicates that the market is indecisive, with neither bulls nor bears in control. A doji candlestick can be a sign of a potential reversal, as it shows that the current trend may be losing momentum and the market may be ready to turn around.