What Are Candlesticks?

Part 1- What are Candlesticks

Japanese Candlesticks Chart:

The most sought after and the easiest form of technical analysis tools are the candlesticks charts. 

But before learning candlesticks, let us try and understand the history associated with the development of candlesticks as technical analysis patterns.

As the name suggests, candlesticks originated from Japan. And the earliest use of this pattern can be stated back to the Japanese rice merchant (Homma Munehisa)  in the 18th century. 

But the concept of candlesticks was introduced to the world of trading in the 1980s by a trader named Steve Nison. He even went on to author the first-ever book on candlesticks titled “Japanese Candlestick Charting Techniques”

 Understanding Candlesticks:

The major difference between Bar chart and the Candlestick chart is their texture and their visual appeal. In the case of a bar chart, the open and close price are shown by a tick on the left and right sides of the bar respectively. But in the case of a candlestick chart, the open and close price is represented by a rectangular box.

In Candlesticks, the candle can be classified as bullish (green/white) or a bearish (red/black) candle. 

Components of Candlesticks:

There are four major components of a candlestick:

  • Open - Price at which the candle is Opened
  • High - The High of the candle within the specified time period
  • Low - The Low of the candle within the specified time period
  • Close - The closing/last traded price of the candle

What is a Bullish Candle?

To put it in simple words, a bullish candle is one where the opening of the candle is below the close of the candle. A bullish candle has the following three components:

  • The Central body: This area of the candle connects the open and close of the candle. 
  • The Upper Shadow: This part of the candle connects the close of the candle with the high of the candle.
  • The Lower Shadow: This part of the candle connects the open of the candle with the low of the candle.

To illustrate-

 

What is a Bearish Candle?

Similar to Bullish candles, even the bearish candle shows the price action for the day. A bearish candle is one where the closing of the candle is below the open of the candle. A bearish candle has the following three components:

  • The Central body: This area of the candle connects the open and close of the candle. 
  • The Upper Shadow: This part of the candle connects the open of the candle with the high of the candle.
  • The Lower Shadow: This part of the candle connects the close of the candle with the low of the candle.

To Illustrate-

 


 A simple glance at the candle gives us a lot of information about the general trend and whereabouts of the market. A bullish trend can be understood from a series of black candles and a bearish trend can be understood from a series of red candles. 

The time frame for which candles can be used:

The candlestick chart patterns can be plotted in various time frames like one minute, 5 minutes, 15 minutes, hourly, 4 hourly, daily and so on. Small time frame charts are extensively used by intraday and short term traders.

Key Takeaways:

  • There are four important components while plotting charts – Open, High, Low and Close​
  • Open<Close, it is a bearish Candle​
  • Open>Close, it is a bullish Candle​
  • Various Time Frames can be used by traders to understand the market momentum in short term and long term​


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