When trading any kind of asset, from stocks and shares to currencies and commodities, the emotional temperature of the market is often just as important as more easily measurable qualities like supply and demand. This was the discovery supposedly made by a Japanese rice trader named Munehisa Homma in the 1700s that led to the invention of candlestick charts to show buyer and seller sentiment, and how this was affecting the price of the item in question.
Candlestick charts show the price movement of an asset and help anyone thinking of investing to make buying or selling decisions based on this information. By looking at the candlesticks, traders should be able to determine whether the mood of the market is bullish, meaning traders are confident and optimistic and prices are likely to rise, or bearish, meaning traders are pessimistic and are inclined to sell, meaning that prices are likely to fall.
What is a candlestick?
A candlestick, in this sense, is an image representing price movement over a specified time period. This is typically one trading day, from the moment the market opens to when it closes, however, it could represent several days, five minutes or almost any length of time you want to see represented. Trading platforms include tools allowing you to customise candlestick charts to your specification: this OctaFX review gives one example of such a platform. The image is called a candlestick because of its distinctive shape, consisting of a long, wide barrel, known as the real body, and a shorter single line at either end, representing the wick, and generally referred to as the shadow.
What does a candlestick show?
The length of both the real body and the shadows will vary, and it is this variation that traders can read in order to see how the price has moved. The colour of the candlestick is also important. A red or black real body will show that the price of the asset fell during the specified period. This is called a down body. A green or white (empty) real body shows that the price rose: this is an up body.
The points of the candlestick
The top of the upper shadow always represents the highest price that the asset reached during the specified period. The bottom of the lower shadow always represents the lowest price. With a red or black candlestick, the top of the upper body represents the opening price of the asset, and the bottom of the upper body represents the closing price. That is because the price fell during the specified period, so the opening price is closest to the highest price and the closing price is near to the lowest price.
A green or white candlestick will have the closing price at the top of the real body and the opening price at the bottom. This is because the price went up over the specified period. The length of the shadow shows how close the opening or closing price was to the highest or lowest price during the period.
A candlestick chart shows a pattern emerging from one candlestick to the next that traders can interpret to predict future price movements. While the same information can be displayed in a bar chart, candlesticks have a visual appeal that many find easier to read.