What Is a Candlestick Chart?
The most popular way to view price movements on your trading charts is by using Japanese candlesticks, usually just referred to as a candlestick chart. That's because candle sticks show us four important pieces of information:
- The highest price
- The lowest price
- The opening price
- The closing price
What Are Candles?
Each one of these is a single candle, and there are two main parts to it. We have the candle body which is the middle rectangle part, usually filled with a colour.
Then the wicks on either side shown as a line extending from the candle.
When we look at a simple line chart, it’s providing us with one piece of information for each data point. Usually this would be the closing price of that time period. So if this is a 5-minute chart, each point on the line is the closing price after each 5-minute period. So here’s 12 hours broken up into 5 minute periods.
But a candlestick provides us with more information for each of these data points. Just like a line chart, it’s showing us information for one period. Here’s the same data as we saw before, but this time using candles. Each candle represents 5-minutes, but you can look at this across all sorts of time frames, such as the 1-hour chart where each candle is a 1-hour period and a daily chart, where each candle is one day, and so on.
What extra information do we gain with a candle chart? There are four main data points:
- The opening price for that period (the price in the market when that period began)
- The closing price for that period (the price when the period ended)
- The highest price and the lowest price during that period
The wicks are showing us the highest and lowest prices. Combined, it’s showing us the range of prices that the market moved through during the period of that candle.
The opening and closing prices are represented by the top and bottom of the candle body. The question is, which one is the opening price and which one is the closing price?
We can base it on the colour of the candle. You can change these colours to whatever you want in your charting package, but the most common combination is to have green candles for a bullish move and a red candle for a bearish move.
A bullish move means the closing price was higher than the opening price, the price went up since the start of that period.
A bearish move is the opposite. The closing price is lower than the opening price, the price went down since the start of that period.
On some occasions, the closing price will be the same as the opening price, or almost the same. Even though the price may have moved during that period, it finished in the same place as it started. These will often just have the candle body as a line, it’s sort of like a cross shape.
There are other charting methods that provide more, or different information, or display it differently. But candlestick charts are the most popular way of viewing price movements, and it's also our preferred method. I'd recommend setting your charts up using candlesticks to get you started.