Candlesticks can form distinctive patterns that improve the probability of a trade, provided you interpret the pattern correctly in the context of the historical price action. The chart displays key indicators of price action, namely the Open price, the High, the Low, and the Closing price. It shows the market sentiment by visually demonstrating the size of price moves with different colors. Traders make use of the Candlesticks to assist their trading decisions based on regularly occurring patterns that help forecast the short-term price movement.
This article will walk you through the basics of a Candlestick chart and help you understand the trading signals through the Candlestick chart.
What is a Candlestick Chart?
Candlestick charts originated in Japan over 100 years before the West developed the bar and point-and-figure charts. Back then, a Japanese rice trader uses the chart to record price movements on paper, laboriously drawing price patterns every day. He’d record the opening day’s price of rice, the low, the high and the close. Over time, he’d begin to see price patterns in his recordings, mapping out repetitive signals in the price bars. He soon discovered that, while there was a link between price and the supply and demand of rice, the markets were strongly influenced by the sentiment of traders. Being visual and informative, candlestick chart was then introduced to the stock and futures market as tool of analysis and has been widely adopted in all markets and is especially popular in the Asia-Pacific region.
Candlestick Chart is a type of financial chart used to describe price movements of an asset within a time period. Each "Candlestick" typically shows a certain timeframe, it can be intervals of seconds or a year. As it can fully display the strength of the price trend and the changes in the balance between buyers and sellers, it carries certain level of accuracy in price prediction and has become a popular technical analysis methodology.
As the cryptocurrency market operates 24/7 and never close, there are no opening and closing prices that we can identify. Therefore, the open and close price can be regarded as the beginning and end of a specified cycle in Candlestick analysis.
A Candlestick shows the market's open, high, low, and close price during the period. Each Candlestick is made up of a body and two shadows (i.e. upper & lower shadow).
Point 1 in the above graphic refers to the Open Price. Open Price is the first transaction price record of an asset in a specific time frame.
Point 2 in the above graphic refers the High Price. High Price is the highest transaction price record of an asset in a specific time frame.
Point 3 in the above graphic refers the Low Price. Low Price is the lowest transaction price record of an asset in a specific time frame.
Point 4 in the above graphic refers the Close Price. Close Price is the last transaction price record of an asset in a specific time frame.
The real body represents the price range between the open and close of that day's trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the close was higher than the open.
Understanding the Candlestick Chart
Traditional bar charts have little meaning by themselves, whereas Candlestick charts display the price action that took place in the market that day with much detailed information. A look at the price action in an asset over time allows you to use pattern analysis to help predict the asset’s future movement.
The look of the Candlestick body and its shadows potentially provide a lot of information about the momentum of the market and the price trends.
The real body represents the price range between the open and close of that day's trading. When the real body is filled or black, it means the close was lower than the open. If the real body is empty, it means the close was higher than the open.
Furthermore, the length of the Candlestick body also shows the momentum of the trading. A long body suggests that the market is trading heavily in one direction, while a small body indicates a lesser momentum.
The look of shadows can also tell you which way the market is heading. Typically, long shadows signify a big change in market direction while short shadows usually indicate that the market has changed little during the candle’s timeframe.The longer the upper shadow, the more unlikely the price will move further up; the longer the lower shadow, the more unlikely the price will move further down.
Candlestick charts are one of the most common tools traders use for technical analysis. It is considered essential to learn reading the Candlestick Charts. The chart visually provides a clear and easy-to-identify set of patterns that could be highly accurate in predicting market trends, while it allows flexibility in data analysis across different time frames.
That being said, Candlesticks are just one among many other tools at the disposal of traders. Used in combination with other methodologies (such as volume and fundamental analysis), Candlestick analysis becomes even more powerful.