What is a Candlestick
A candlestick is one of the most basic financial charts to describe price movements, based on 4 important components.
It shows the open, low, high and closing price of an asset during a specific time period. On most Cryptocurrency Exchanges the time periods reach from 1 minute to 1 day or even a week.
An investor may decide after interpreting candlestick patterns and other circumstances whether he wants to invest or not.
The color of the candlestick shows the price trend. While green candles indicate buy pressure, red candles show sell pressure.
The wider part of the candlestick is called the real body. It shows the user whether the closing price was higher or lower than the initial opening price.
The top of the candlestick represents the highest and the bottom the lowest trading price within your time frame.
The open price is represented at the top of the body in the red candlestick and at the bottom of the green one.
The close price is represented at the top of the body in the green candlestick and at the bottom of the red candlestick.
The parts between the top of the body and the high are called the upper shadow.
The part between the bottom of the body and the low is called a lower shadow.
In simple words:
Imagine that the candle starts at the opening price and depending on the price movement, it moves up ( candle gets green) or down (gets red). That's the reason for the different location of open and close prices. Watching a 1 min candlestick might help if you struggle with that.
Many traders consider the visualization of candlesticks more appealing than traditional charts. All in all a candlestick is much easier to interpret. The trader can compare the highs, lows, open and close of the candlestick within a blink of an eye. The main usage of different candlesticks is to identify trends. Candlesticks should always be interpreted in the context of the whole market structure as a different structure may result in more or less significance. They also might help identify a change in market sentiment.
Candlesticks are just an additional layer on top of other technical analysis tools to determine a clear trading strategy.
When a trader wants to evaluate patterns, he should try to wait for the forming of the next candle before analyzing the previous one. Every news can turn the whole pattern upside down and make it useless.
There are different candlestick patterns, a trader should be aware of. We will start with a few simple ones here and speak about more complex patterns in an extra article.
A candlestick that consists of a very tiny body near the high with no or only a little upper shadow. Considered bullish pattern during a downtrend.
It forms when the open, high and close are roughly in the same price range.
The exact opposite of the Hammer is the Inverted Hammer.
Inverted Hammer/Shooting star
It may appear at the peak of an uptrend when people want to start a rally but lose control to bears to drive the price down to a close below the open. The longer the duration of the candlestick, the more powerful it is.
A classic Doji candle represents an indetermined market situation with a very thin body and equal wicks. It shows that opening and closing prices are virtually equal. There are different doji candles that show different market situations, like trend reversal or exhaustion.
Complex patterns like the following will be explained here.
- Three Soldiers
- Bullish Engulfing Pattern
- Morning Star
Candlesticks have been developed in the 18th century by Japanese people tracking the price of rice. They were Later introduced to the West. Some people will realize the visual similarity to box plots, but box plots show different information