A candlestick chart is a style of financial chart used to describe price movements of a security, derivative, or currency. It originated from Japanese rice merchants and traders to track market prices and daily momentum hundreds of years before becoming popularized in the United States.
The chart is composed of individual “candles,” each representing a specific interval of time – for instance, one day or one hour. Each candlestick includes the following information:
- Open: The opening price at the beginning of the time interval.
- High: The highest price during the time interval.
- Low: The lowest price during the time interval.
- Close: The closing price at the end of the time interval.
These four elements form the basis of the candlestick, creating what appears to be a candle with wicks. The “body” of the candle is the range between the open and close prices, while the “wicks” or “shadows” represent the high and low prices.
If the close price is higher than the open price, the body of the candle is often filled (or colored differently), indicating a bullish (price rising) interval. Conversely, if the open price is higher than the close price, the body is often empty (or colored differently), indicating a bearish (price falling) interval.
Traders and investors use candlestick charts because they provide a lot of information at a glance and can help identify market trends and potential reversal points. The pattern of the candlesticks can form various known patterns that traders often interpret as indicators for price movement prediction. Examples of these patterns are Doji, Hammer, Engulfing, etc.