Candlestick charts

by Admin
Updated: July 19, 2018

A basic introduction to candlestick charts and how candles represent price action in financial charts

Instead of being a simple line graph showing prices vs time, the data points on financial charts typically take the form of vertical bars that look like double-ended candles. This introduction explains the basic structure of these representations.

Candles overcome the sample rate disadvantage of point (and line) plots by using wicks & tails to indicate the full range of price action for any given time period:

The structure of a candle

Each candlestick commonly represents a fixed period of time and provides a summary of the price action within successive periods.

A candle has three components: Its real body, a top wick called the upper shadow and a bottom wick (tail) called the lower shadow:

Upper shadow




 Real body




Lower shadow

The upper & lower bounds of the real body are the opening & closing or closing & opening prices respectively:

  • If the closing price is lower than the opening price, i.e. the price has gone down, the candle is filled/black or red.
  • If the closing price is higher than the opening price, i.e. the price has gone up, it is hollow/white or green (or blue).

The top of the upper shadow is the highest price achieved during the period. If this is not higher than the opening/closing price it will not been seen.

The bottom of the lower shadow is the lowest price achieved during the period. If this is not lower than the opening/closing price it will not been seen.

Notes

If the period of the candle is current then the closing price is the current price and will be changing in real time.

It is important to remember that a time period is not a time interval. Candles for any particular time period include all the data during that period whereas a time interval is a sampling rate.

Volume is important and candlestick charts can be configured so that the candles represent a fixed volume of trading. When this is the case, attention must be given to the horizontal/y-axis. Otherwise the volume is indicated in some other way such as a histogram.

Heikin-Ashi bars look like normal candlesticks but use averaged open & close values. They can be useful for showing trends but should not be confused with regular candles.

Periods when there is zero volume, such as when the market is closed, are normally omitted. This might be important if you are interested in how such breaks affect price action.

When the periods being measured are consecutive periods of uninterrupted trading, each new opening should be equal to the previous close like this:

More info

Candlestick charts are thought to have been developed in Japan in the 19th century. They were introduced to the West in the book, Japanese Candlestick Charting Techniques by Steve Nison.

“Introduction to Candlesticks” (ChartSchool) at stockcharts.com.

“Candlestick Charting: What Is It?” at investopedia.com.

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