What is a Candlestick?
A candlestick is a type of chart that displays four key price points (open, high, low, and close) for a specific time period in the shape of a candle. It is believed to have originated in 18th-century Japan for analyzing rice markets and has since become the most popular charting method used by traders worldwide.
Known internationally as the "Candlestick Chart," this Japanese-born technical analysis method is highly valued around the world. A single candlestick can reveal the battle between buyers and sellers during that period.
Key Concepts of Candlesticks
The Four Prices (OHLC)
Each candlestick is composed of four prices:
- Open: The first price at the beginning of the period
- High: The highest price during the period
- Low: The lowest price during the period
- Close: The last price at the end of the period
Bullish and Bearish Candles
- Bullish candle (white/red in Japan, green in Western charts): The close is higher than the open, indicating buying pressure was dominant
- Bearish candle (black/blue in Japan, red in Western charts): The close is lower than the open, indicating selling pressure was dominant
Body and Shadows
A candlestick consists of two parts: the body and the shadows (wicks):
- Body: The thick section between the open and close. A longer body indicates greater price movement
- Upper shadow: The thin line above the body, showing the price reached higher but was pushed back down
- Lower shadow: The thin line below the body, showing the price dropped lower but was bought back up
Common Candlestick Patterns
- Long bullish candle: A candle with a long body closing higher. A strong buy signal
- Long bearish candle: A candle with a long body closing lower. A strong sell signal
- Doji: Open and close are nearly the same. Suggests a potential turning point
- Dragonfly Doji: No upper shadow with a long lower shadow. A buy signal at market bottoms
Key Points for Beginners
- Candlesticks are the most fundamental way to read stock charts. Start by getting familiar with daily candlesticks (one candle per day)
- Pay attention not just to individual candles but also to combinations and patterns such as harami (inside bar) and engulfing patterns
- It is risky to make trading decisions based on candlestick shapes alone. Always combine them with other indicators like moving averages and volume
- Analyze different timeframes such as daily, weekly, and monthly charts for more accurate trend assessment
- Note: In Japanese charts, bullish candles are typically shown in red/white and bearish in blue/black, which is the opposite of Western convention.
Summary
Candlesticks are a Japanese-originated charting method that displays four prices (open, high, low, close) in a candle-like shape. Bullish and bearish candles reveal buying and selling pressure, while shadow lengths show the struggle between buyers and sellers. Understanding this analysis method, used by traders worldwide, is the first step in learning technical analysis.