A candlestick chart is a style of financial chart used to describe price movements of a security, derivative, or currency. Each “candlestick” typically shows one day, thus a one-month chart may show the 20 trading days as 20 candlestick.
Japanese rice traders developed candlesticks centuries ago to visually display price activity over a defined trading period. Each candlestick represents the trading activity for one period. The lines of a candlestick represent the opening, high, low and closing values for the period.
The main body (the wide part) of the candlestick represents the range between the opening and closing prices. If the closing price is higher than the opening price, the main body is white. If the closing price is lower than the opening price, the main body is black. The lines protruding from either end are called wicks or shadows.
Even though the structure of candlesticks is different from that of bar charts, it is easy to combine candlesticks with the technical chart analysis. By focusing on the relationship between open and close prices, candlesticks show how market forces change during market hours. This often indicates the short-term momentum in different products or markets.
In this section, we describe basic candlestick charting and chart analysis. We concentrate on the most meaningful patterns for traders.
Combining candlestick charts with Fibonacci trading tools and chart patterns is an effective strategy because every combination is based on the same principle: the analysis of investor behavior, as expressed through the Fibonacci ratios, candlesticks, or chart patterns.
Structure of Candlestick Charts
Candlestick charts are based on the same market data as regular bar charts but present that data in a different way. The components of candlestick charts are the opening price level, the closing price level, the high price, and the low price of any data compression rate, be it weekly, daily or intraday data.
The relationship between the open price level and the close price level forms the body of the candlestick chart. If the close is below the opening, the body is black. If the close is above the opening, the body is white. The opening and closing price of every data compression— weekly, daily, or intraday—is, therefore, important for analysts who use candlestick charts.
The price moves above and below the candlestick body called the “shadow.” Depending on how large the distance is between high and low of a price bar to the body of the candlestick, the shadows can be long or short.