What Are Candlestick Charts and How Do They Work

When trading any kind of asset, from stocks and shares to currencies and commodities, the emotional temperature of the market is often just as important as more easily measurable qualities like supply and demand…and candlestick charts show buyer and seller sentiment, and how this was affecting the price of the item in question.

What’s the Purpose Of Candlestick Charts?

• Candlestick charts…[allow] traders…to determine whether the mood of the market is
  • bullish, meaning traders are confident and optimistic and prices are likely to rise, or
  • bearish, meaning traders are pessimistic and are inclined to sell, meaning that prices are likely to fall.
• A candlestick chart shows a pattern emerging from one candlestick to the next that traders can interpret to predict future price movements. While the same information can be displayed in a bar chart, candlesticks have a visual appeal that many find easier to read.

What Is A Candlestick?

A candlestick…is an image representing price movement over a specified time period…[be it] one trading day…several days, five minutes, or almost any length of time you want to see represented…The image is called a “candlestick” because of its distinctive shape, consisting of a long, wide barrel, known as the “real body”, and a shorter single line at either end, representing the “wick”, and generally referred to as the “shadow”.

What Does A Candlestick Show?

• The length of both the “real body” and the “shadows” will vary, and it is this variation that traders can read in order to see how the price has moved…
• A red or black “real body” will show that the price of the asset fell during the specified period. This is called a “down body”. A green or white (empty) “real body” shows that the price rose: this is an “up body”.

What Do the Points Of the Candlestick Represent?

• The top of the upper shadow always represents the highest price that the asset reached during the specified period.
• The bottom of the lower shadow always represents the lowest price.
• With a red or black candlestick, the top of the upper body represents the opening price of the asset, and the bottom of the upper body represents the closing price. That is because the price fell during the specified period, so the opening price is closest to the highest price and the closing price is near to the lowest price.
• A green or white candlestick will have the closing price at the top of the real body and the opening price at the bottom. This is because the price went up over the specified period.
• The length of the shadow shows how close the opening or closing price was to the highest or lowest price during the period.