A Candlestick is a way to plot prices on a chart. Today candlesticks are the most frequently used for charting prices as they offer several benefits, such as an easily understandable visual representation of prices, providing broader insight into market sentiments, trend identification, and prediction of future price movements.
Let's now learn, How to read a candlestick?
When a stock closes above the opening price the candlestick is shown in green. In a green candle, the upper edge of the body shows the closing price of the stock while the lower edge of the body shows the opening price as shown alongside. The distance between the upper wick and the lower wick, that is, high and low is called the range of the candle.
Similarly, a red candle means in that period the stock closed below its opening price. The upper edge of the body of the red candle thus represents the opening price while the lower edge depicts the closing price. The upper and lower wick, as usual, show the high and low of that period respectively. This is shown in the image alongside.
In this post, you will learn about the basics of candlesticks, such as what candlesticks are? What do they look like in a chart? How to read a candlestick? So, let's get started
What is a Candlestick?-
A candlestick is a visual representation of prices in a chart. A single candlestick gives information about four prices- open, close, high, and low. It is called a candlestick as it looks like a candle with a wick on a chart.
It was developed by rice traders in Japan in the 17th century. Homma, a rice trader in Japan is credited with the discovery and development of candlesticks. Later on, it was uncovered by Western traders and became popular among them. Nowadays, candlesticks are the most frequently used way to depict prices on a chart worldwide.
What does a Candlestick look like in a chart?
As the name suggests a candlestick looks like a candle with a wick. Just like a candle it has a body and wicks at one or both ends of the body. Further, Candlesticks are shown in two colours on a chart- red and green.
Take a look at the chart below. You would see various candles having different lengths of body and wicks. Also, notice that the candlesticks shown in the chart are of two different colours. Some candlesticks are red while others are green.
Each of these elements in a candlestick represents an information. Like, the upper and lower end of the body, the wicks and the colour of the candle all give a piece of information to the analysts.
Let's now learn, How to read a candlestick?
How to read a candlestick?
In a given period, a stock can have four sets of prices. The opening price or open, the closing price or close, the high or the highest price the stock has traded in a period and the low or the lowest price the stock has traded in the period.
A candlestick depicts all these prices.
The upper wick represents the high of the period and the lower wick represents the low of the period. The upper and lower ends of the body show the open or close price of the period.
When a stock closes above the opening price the candlestick is shown in green. In a green candle, the upper edge of the body shows the closing price of the stock while the lower edge of the body shows the opening price as shown alongside. The distance between the upper wick and the lower wick, that is, high and low is called the range of the candle.
Similarly, a red candle means in that period the stock closed below its opening price. The upper edge of the body of the red candle thus represents the opening price while the lower edge depicts the closing price. The upper and lower wick, as usual, show the high and low of that period respectively. This is shown in the image alongside.
A candle represents a specified period. For example, in a daily chart, one candle represents the price movement of an entire day. So, in a daily chart, the prices depicted by the candle are, the opening price of the stock when trading started on the day. The high and low the stock made during the day and finally the price at which the stock closed after trading stopped for the day.
Similarly, in an hourly chart, the candlestick shows the opening price at the start of the hour, the high and low the stock made during the hour and finally the closing price at the end of the hour.
Similarly, you can have candlesticks for a week, month, 15 minutes, 10 minutes, hours or any other timeframe you specify.
One of the reasons why candlesticks became so famous is because they depict the price movement of an entire timeframe. For example, in a daily chart, a candlestick will reflect what happened in that entire day. Other reasons for the popularity of candlesticks are their ability to reflect the psychology of traders and also provide valid trading signals. But we will learn the details of these signals in other posts. So, stay tuned and subscribe to get regular updates.
Post a Comment