Candlesticks are like the storytellers of the financial world. They use simple shapes to tell us a lot about how the prices of stocks, currencies, or other assets have been behaving.
Candlesticks are graphical representations of price movements. They show how an asset’s price changes over a specific time period, like a day or an hour.
History
Candlestick charts have a rich historical background dating back to Japan in the 18th century. They were developed by a Japanese rice trader named Munehisa Homma.
Homma’s first work was tracking the price of rice using candlestick-like graphical representations, which laid the foundation for modern candlestick charting.
What Do Candlesticks Look Like?
A single candlestick has two main parts:
- Body (Boxpart): It shows the opening and closing prices during the chosen time period. If the closing price is higher than the opening price, the body is usually filled in or colored differently. If it’s the other way around, the body might be left empty or a different color.
- Wicks/Shadows: The lines sticking out from the body are called “wicks” or “shadows.” The upper wick shows the highest price reached during the time period, while the lower wick shows the lowest price.
Types of Candlesticks
There are two main types of candlesticks.
- Bullish Candlestick: A bullish candlestick is typically colored green. It signifies that the closing price of the asset is higher than the opening price, indicating upward price momentum. The body of the candlestick represents the price range between the open and close, while the upper wick shows the highest price and the lower wick shows the lowest price during the time period.
- Bearish Candlestick: A bearish candlestick is often colored red or left empty. It suggests that the closing price is lower than the opening price, reflecting downward price movement. As with a bullish candlestick, the body represents the open-to-close price range, and the wicks show the highest and lowest prices.
How Do Traders Use Candlesticks
- Traders use candlestick patterns to understand market sentiment.
- These patterns serve as leading indicators, helping traders predict bullish (upward) or bearish (downward) market movements.
- Candlestick analysis is especially relevant in cryptocurrency trading, including Bitcoin.
- Recognizing candlestick patterns allows traders to act on signals before the broader market catches on.
- Candlestick charts provide raw price data and swiftly update, making them essential leading indicators in a trader’s toolkit.