How to Read and Use Candlestick Charts
Candlestick charts are an efficient way to view an asset's price changes. Candlesticks quickly show how far and in which direction the price of an asset moved during a specific time period.
Candlesticks are popular because of their superior visual appeal when compared to bar or line charts. Each candle represents the passage of a certain amount of time or the completion of a certain number of trades. You can select the time frame or number of trades in the settings for your chart provider. Popular candlestick time frames for day trading are one minute and five minutes.
The set number of trades that must be carried out before a new candle starts to form is collectively known as a tick. Commonly used numbers of trades per tick are 233, 466, and 512. The tick doesn't take into account the number of contracts within a trade; the tick is only about the number of trades.
If you're using a five-minute time frame, for example, each candle will show the high, low, open, and close price for that five-minute period, as well as show the direction the price moved during those five minutes.
Candles can be created for virtually any market you wish, and nearly every charting platform available offers candlestick charts.
Each candlestick is composed of a real body and two wicks (which are also called shadows or tails). The real body is the substantial part of the candle. It reflects the difference between the open and close price for that period.
The open and close prices are the first and last transaction prices for that time period. When there is no real body or the real body is very small, it means the open and close prices were the same or almost the same.
The real bodies are typically one solid color, though they may also be hollow, with only their edges displaying a color. Their coloring depends in part on the color scheme used by your charting platform, but white/black and green/red are commonly utilized.
A white or green candle means the price finished higher over that time period. Because the closing price is higher than the open price, the bottom of the real body represents the open price and the top of the real body represents the close price.
A black or red candle means the price finished lower over that time period. Therefore, the top of the real body is the open price and the bottom of the real body is the close price for that time period.
Wicks or Shadows
The wicks or shadows—the thin lines above and below the real body—represent the movements above and below the open and close prices.
The highest part of the wick on top of the real body marks the high price for that period. If there is no upper wick, then the top of the real body was also the highest price during that period.
The lowest part of the wick on the bottom of the real body marks the low price for that period. If there is no lower wick, then the bottom of the real body was also the lowest price during that period.
The difference between the high and low prices is the price range for the period.
Due to the visual nature of candlesticks, day traders have looked for and recognized patterns that indicate a continuation or reversal of a trend and highlight trading opportunities.
Candlestick patterns, such as Three Line Strike and Two Black (or Red) Gapping, are best used in conjunction with trend analysis, including the use of technical indicators. If one or more technical indicators in your candlestick chart reinforces the trend you've detected in the candlestick pattern, you have even more reason to initiate a trade.