Overview

A candlestick chart (also called Japanese candlestick chart or K-line) is a style of financial chart used to describe price movements of a security, derivative, or currency.

While similar in appearance to a bar chart, each "candle" represents four important pieces of information for that day: open and close in the thick body, and high and low in the "candle wick". Being densely packed with information, it tends to represent trading patterns over short periods of time, often a few days or a few trading sessions.

Candlestick charts are most often used in technical analysis of equity and currency price patterns. They are used by traders to determine possible price movement based on past patterns, and who use the opening price, closing price, high and low of that time period. They are visually similar to box plots, though box plots show different information.

History

Candlestick charts are thought to have been developed in the 18th century by Munehisa Homma, a Japanese rice trader. They were introduced to the Western world by Steve Nison in his book Japanese Candlestick Charting Techniques, first published in 1991. They are often used today in stock analysis along with other analytical tools such as Fibonacci analysis.

Description

The area between the open and the close is called the real body, price excursions above and below the real body are shadows (also called wicks). Wicks illustrate the highest and lowest traded prices of an asset during the time interval represented. The body illustrates the opening and closing trades.

The price range is the distance between the top of the upper shadow and the bottom of the lower shadow moved through during the time frame of the candlestick. The range is calculated by subtracting the low price from the high price.

The fill or the color of the candle's body represent the price change during the period. Normally, if the asset closed higher than it opened, the body is displayed as hollow (or the green color is used), with the opening price at the bottom of the body and the closing price at the top. Conversely, if the asset closed lower than it opened, the body is displayed as filled (or the red color is used), with the opening price at the top and the closing price at the bottom.

Modern charting software permits unrestricted customization of candle looks and colors, so the actual look of rising or falling price candles may vary.

Usage

Candlestick charts are a visual aid for decision making in stock, foreign exchange, commodity, and option trading. By looking at a candlestick, one can identify an asset's opening and closing prices, highs and lows, and overall range for a specific time frame. Candlestick charts serve as a cornerstone of technical analysis. For example, when the bar is white and high relative to other time periods, it means buyers are very bullish. The opposite is true when there is a black bar.

A candlestick pattern is a particular sequence of candlesticks on a candlestick chart, which is mainly used to identify trends.

Heikin-Ashi candlesticks

The body of a Heikin-Ashi candle does not always represent the actual open/close. Unlike with regular candlesticks, a long wick shows more strength, whereas the same period on a standard chart might show a long body with little or no wick.