Beginners' Guide to Candlestick Charts

BeginnerNov 21, 2022
Candlestick charting is the most basic and important indicator in technical analysis. Understanding candlestick charting can help with investment decisions.
Beginners' Guide to Candlestick Charts

What Are Candlestick Charts?

Candlestick Components

Understanding Candlestick Charts

The Unspeakable

Investment decisions are made using fundamental and technical analysis. If you want to use technical analysis to read market trends, you must first learn to read candlestick charts. Candlestick charting is the most basic and important component of technical analysis. Candlestick patterns are essentially the visualization of complex data.


What Are Candlestick Charts?


Basically, candlestick patterns are simplified data and they are used to record the performance of a commodity or market in a certain period of time, where graphic signs representing price fluctuations are produced. Not only stocks, early rice markets, but also various exchange rates, futures, source materials, gold, oil, and indices, as long as there are price fluctuations, candlestick patterns can be used to record them.


As a chart that records the price trajectory within a period, it is called a “candlestick chart” because of its candle-like shape. It is said that this tool was invented more than 300 years ago by Honma Munehisa, a rice merchant in the Edo period in Japan. It was used to record the daily price changes and the market conditions of rice. Later generations developed a set of rules and methods about candlestick charting called "Sakata’s Constitution". Only until the 19th century did Japanese candlestick charting become known to the western world, thanks to the book Japanese Candlestick Charting Techniques.


Candlestick Components


Period

A candlestick that shows:

  • price changes within a day is called a daily candlestick

  • price changes within a week is called a weekly candlestick

  • price changes within a month is called a monthly candlestick



Structure

A candlestick shows the market's open, high, low, and close price of the chosen time period. Between the open price and close price is what is called the “real body”. The highest price and lowest price are the ends of the upper shadow and lower shadow respectively.


Note: In western financial markets, up candles are shaded green, and down candles are shaded red. In Asian financial markets, it is exactly the other way around.




Components

The real body shows the open price and the close price, while the thin lines named “wicks” or “shadows” show the highest price and lowest price.


Up candles: Shaded green (red in Asia) because the close price is higher than the open price.

Down candles: Shaded red (green in Asia) because the close price is lower than the open price.

Upper shadows: The end of the upper shadow represents the highest price recorded in the chosen time period.

Lower shadows: The end of the lower shadow represents the lowest price recorded in the chosen time period.



4 points: open, close, high, low

Open price: The price of the first transaction made in the chosen time period.

Close price: The price of the last transaction made in the chosen time period.

High price: The highest price of a transaction recorded in the chosen time period.

Low price: The lowest price of a transaction recorded in the chosen time period.


The positions of the 4 points vary with the market trend. No matter how arbitrarily the price changes, you can roughly understand the market on any trading day just by looking at the 4 points.


Understanding Candlestick Charts


Compared with simple bar charts and line charts, candlestick charts reveal more market information. They not only record price changes but also make it easier for traders to judge the level of bullishness or bearishness.


Candlestick charts roughly display the long-term and short-term market trends over a period of time. During a certain period of time, the longer the real body, the greater the buying pressure or selling pressure; the longer the upper and lower shadow, the more the close price deviates from the highest price and lowest price.


The 4 most important points "open, close, high, low" are the basis for judgment. The gap between the two ends of the upper and lower shadow is the gap between the highest price and the lowest price. The open price and close price represent the start and end of this period’s trading and can help determine the overall rise or fall of the price. High and low represent the volatility of the market in this trading period.


Colors and other parameter settings are subject to the traders’ preference. Generally speaking, candlestick charts in European and American countries show green ups and red downs, while Asian traders are more used to red ups and green downs. The color of the entire candlestick is determined by the position of the open and close price.



Common Examples


The close price is the lowest or highest price.

Meaning: Strong bearish or bullish momentum.

    

The price experiences a big sudden fall, leaving behind a long lower shadow. Strong selling follows the opening. The price falls after a large number of sales. Later the price rebounds due to a large number of purchases and closes at the highest price.


A long upper shadow indicates that strong buying follows the opening. The price rises due to a large number of purchases. Later the price rebounds due to a large number of sales.


Meaning: Might be a signal of a turn in the market.


 

Long upper and lower shadows indicate competition between bullish and bearish traders. If the upper shadow is longer than the lower shadow, it means the selling pressure is stronger than buying pressure; if shorter, then weaker.


Meaning: This candlestick indicates that buy and sell orders are on par, which is usually a sign of a reversal or consolidation.


The Unspeakable


To sum up, candlestick charts can help traders judge the market trend, but may not provide all the necessary knowledge. Candlestick charts only show the difference between the highest price and the lowest price, but do not indicate which point comes first, and thus do not record more detailed events that take place between the opening and closing. Therefore, most charting tools allow traders to zoom in on shorter time periods for more detailed information.


There are a lot of unstable factors in candlestick charting, especially when each candlestick represents a very short period of time, where it is extremely difficult to interpret the patterns accurately due to quick changes of candle shapes and colors.


Conclusion


By combining all the candlesticks over a period of time, a candlestick chart can be drawn, with the horizontal axis being time and the vertical axis being price. As an introduction to technical analysis, candlestick charting is a basic tool that can be read to quickly understand the price trend of a commodity or financial market over a period of time. It is recommended that investment decisions are made after performing technical analysis, along with other fundamental information, technical indicators and other tools designed to provide essential assistance.


Investors should be able to tailor a good trading strategy for themselves using technical analysis, fundamental value evaluation and information from all parties combined with experience.


Author: Jz
Translator: Yuanyuan
Reviewer(s): Hugo, Jiji, Yuler
* The information is not intended to be and does not constitute financial advice or any other recommendation of any sort offered or endorsed by Gate.io.
* This article may not be reproduced, transmitted or copied without referencing Gate.io. Contravention is an infringement of Copyright Act and may be subject to legal action.