Candlestick Charts are among the most used tools through which traders analyze market activity. This can be attributed to their design – which is relatively easy to interpret – and the vast range of information a trader can read from them. Let’s shine a light on them.
This form of charting was coined in the 17th century by a legendary rice trader who went by the named Honma. This is a significantly long time before we techniques were developed.
Honma built his method on the premise that – as much as the supply-demand plays a role in the price of rice, the emotions of the traders are just as important. The traders emotions being represented as price moves – of different sizes – in different colours.
The Anatomy of Candlestick Charts
Candlestick Charts are built to display four aspects of a commodity’s price movements in a given period. These are, the opening price, the lowest price, the highest price and the closing price for that period.
The position of the opening price is dependent on the direction of the assets price. If the given asset’s price is in an upward move, the opening price will be the bottom of the candle. Inversely, if the price is trending down in that given time frame, the opening price will be at the bottom of the candle.
These price movements are often marked by colours as well. With downward trends being coloured in red or black, while up trends are usually marked in green or white.
The lowest price is marked by a tail coming from the bottom of the main body of the Candlestick. These are sometimes referred to as the wicks of the candle.
One should note that if the closing price marks the lowest point of that period, then there will be no wick.
Just like the lowest price, the highest price point in a session is marked by a wick. The only difference is that the wick is always at the top of the candle’s main body and will not be visible if the closing price of an up trend is in fact the highest point the price got to.
The closing price in a candle represents the last price an asset was traded at during a given time frame. In an up trend, the closing price will be at the top of the candle. In a down trend, the closing will be on the opposite end of the candle.
Candlesticks can also be used as an indicator of market volatility by looking at the range of the price movements. This is shown by the length of the candle (the distance between the open and close).
Traders also use candlesticks to read the general direction of the price movements of specific time frames. The position and colour of each candle are indicators of the direction an asset’s price is moving in.
If the candle is green or white, and positioned to the right of – and somewhat above – the candle prior to it, the price in that session is in an up tick. If the general direction of a session is downward moving, the candle will be red/black and positioned below the previous candle.
It is not difficult to see why traders like candlesticks. They are relatively easy to understand while encompassing a number of important bits of information about market activity. These, coupled with other indicators, can prove themselves an invaluable resource.