An Introduction to Candlestick Charts

Candlesticks were originally developed by Japanese traders who used it to analyze the price-movements only in RICE commodity and find the weakening trends and the potential trend reversals. Those days, candlesticks came in many colors including Blue, yellow, Green and the red but over a period of time, candlesticks have lost their colors. Now they come only in Green and Red but that doesn’t mean that they have lost the respect they command. The application of Candlesticks has got even finer now with multiple applications, chart reading patterns and trading opportunities coming out of these and thus the reason why candlesticks still continue to enjoy the patronage of the best of the traders, financial institutions and also the Banks. Let’s take a closer look to what candlesticks are and how they project some very-good tradable opportunities.

A typical candlestick is like a cylindrical bar that shows Open, High, low and Close-price of the product under consideration, over a specified period of time. The trader or the analyst gets to change the Candlestick to any time-period of his own choice suiting his own trading- style, so a candlestick can represent the OHLC data for any time- frame starting from as less as one-minute to even one complete year. However, the standard thing that you will always notice in any Candlestick is that it turns green if the close-price of the time-period was higher than the open-price and turns Red if lower. The following picture and the explanation will make it easier to understand…

EACH CANDLESTICK HERE REPRESENTS FIVE-MINUTES DATA

This is how a candlestick chart may look within a trading platform:

 

As you may notice, the Green and the Red-color figures in this chart look like a candle and thus are always called “the candlesticks”. The two extreme ends on each candlestick represent High- price and the Low-price of the period with a cylindrical figure in-between the two. The two ends of the cylinder in the middle represent the open and the close-price of the same time-frame as chosen. As we learnt before, the figure turns green when the close-price is higher than the Open-price and Red if opposite and thus the reason why you see all these candlesticks in different colors. It precisely is this color pattern and the changes in these colors that lay the foundation of candlestick-trading. Let’s explore.

The candlestick traders have their own styles of reading the charts with the use of candlesticks as an aid to their chart analysis. While the most practiced style of trading pertains to identifying consecutive candlesticks with the same color to suggest a trend, the innovators, over a period of time, have developed their own styles where they look for higher- high and higher-lows for similar colors and then go with the trend. There is also the crossover- technique where they draw moving lines over these candlesticks to find deviations or emerging changing-patterns and then form anticipations to their future movements. Of course, there is no standalone theory to find a definite trade but candlesticks do offer clarity on reading the trend with the help of their colors and then the trader can choose his own strategy to follow i.e. trend-continuation or the trend-reversals. While the same color consecutive candlesticks are symbolic of a likely trend-continuation, the changing color denotes the likelihood of a sudden reversal. With deeper studies and also with the time, came the Maruboju-candlesticks, Doji- candlesticks and Dragonfly-candlesticks along with numerous similar extension to read these charts even better and project even stronger bearish and bullish signals but even the basic study of the candlesticks by even a beginner-trader itself can offer such tremendous scope for improvement, innovations and profit-making that you will never need to go any further than these.