In this guide to understanding basic candlestick charts, we’ll show you what this chart looks like and explain its components. We also provide an index to other specialized types of candlestick analysis charts.
What Are Candlestick Charts?
Candlestick charts are an effective way of visualizing price movements invented by a Japanese rice trader in the 1700s.
Astute reading of candlestick charts may help traders better understand the market’s movements.
How to Read Candlestick Charts
Candlesticks summarize a period’s trading action by visualizing four price points:
|Open||Price at the beginning of the period|
|Close||Price at the end of the period|
|High||The maximum price achieved during that period|
|Low||The lowest price of the asset during the period|
What Are the Parts of a Candlestick Chart?
There are three main parts to a candlestick:
Upper Shadow: The vertical line between the high of the day and the closing price (bullish candle) or open (bearish candle)
Real Body: The difference between the opening price and closing prices. This is shown by the colored portion of the candlestick.
- A green (or white) body indicates that an asset’s price moved higher over the day’s trading.
- A red (or black) body indicates that prices ended lower than they were at the day’s opening.
Lower Shadow: The vertical line between the low of the day and the open (bullish candle) or close (bearish candle)
How to Interpret Price Movement on a Candlestick Chart
There are two basic candlesticks which are illustrated on the image above:
- Bullish Candle: When the close is higher than the open (usually green or white)
- Bearish Candle: When the close is lower than the open (usually red or black)
More Candlestick Patterns
Candlestick patterns can be made up of one candle or multiple candlesticks. They can also form reversal or continuation patterns.
Here are some of the most popular candlestick charts, explained:
- Bullish Engulfing Pattern
- Bearish Engulfing Pattern
- Dark Cloud Cover
- Dragonfly Doji
- Evening Star
- Gravestone Doji
- Hanging Man
- Inverted Hammer
- Morning Star
- Piercing Pattern
- Shooting Star
- Tweezer Tops & Bottoms
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Here are some answers to common questions about candlestick charts.
Which candlestick pattern is most reliable?
Two of the most reliable candlestick patterns are the Morning Star (bullish reversal pattern) and Evening Star (bearish reversal pattern) indicators. They rely on three days’ worth of pricing to identify a trend that may signal a reversal. Engulfing patterns (bearish or bullish) are also fairly reliable since they compare two-day trends.
What do the wicks on candlestick charts mean?
As shown in the graphic below, the top wick of a candlestick indicates the highest price reached during the time period (eg, a day). The bottom wick shows the lowest price. The “candle” part of the chart shows the opening and closing prices for the time period.
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