The reason why candlestick charts make for an effective way of forecasting price movements and forming technical analysis for effective trading and maximal return on investment (ROI) is reflected in the fact that candlestick charts contain four key metrics to describe market trends and price movements to traders.
Much like bar charts, candlesticks are designed to showcase low price, high price, closing price and opening price for the time period specified individually by traders. This way, traders may follow up with historical data on the key metrics regarding price movement and find out the lowest and highest points in the value of assets for a given period.
Candlestick charts draw their roots from Japan during the beginning of the 18th century, when Japanese trader Munehisa Homma discovered that there is a strong connection between the price of goods — rice in the original case — and demand and supply. At the time, Western civilizations were only familiar with bar charts, also using point and figure charts; however, nowadays, candlestick charts are some of the most commonly used for technical analysis and are considered relevant trading tools for various assets and commodities. The candlesticks define the nature of price movements recorded in the chart and are used for determining the future movement of price changes based on historical values. In comparison to bar charts, candlesticks more accurately describe the changes in market prices, which is why these charts are commonly used for forming a technical analysis.
Candlestick Morphology Explained: Open, Close, High, Low, Wick (Shadow), Tail
Candlestick bodies are usually coloured in red and green, where red stands for downtrends and shows that lows are prevailing, and green candlesticks indicate uptrends and represent price increases as opposed to opening and closing prices, and highs and lows for a certain period of time. Although red- and green-coloured candlestick bodies are the most popular version offered by the majority of exchange platforms that provide transparent key metrics, candlesticks may be coloured in black to showcase downtrends and in white to indicate price surges and positive market trends.
High price and low price are shown at the peak of the candlestick body, outside the “real body”, which is the name for the thicker part of the candlestick body. In this case, the low price will be graphically displayed at the bottom and the high price will be showcased at the top of the body. The real body, which is the thicker part of the candlestick chart, shows the close and open price. In the case of red-coloured candlesticks that indicate downtrends, close price will be displayed at the bottom while open price will be shown at the top. It is the opposite case with green-coloured, or upward-trend-indicating candlesticks, which show the close price at the top and the open price at the bottom of the real body. When a candlestick body is empty or coloured in green, in the majority of cases this indicates that the closing price was higher than the opening price. There are other data points aside from close, open, high, and low, referring to upper and lower shadow, a.k.a. upper and lower wick. The wick or candlestick shadow is also known as a tail, representing a line that indicates the distance between the closing and opening price for a given time period. The nose is the opposite line from the tail, or wick (shadow).
As the real body is showing open and close price, the length of the line represented as wick, or shadow, relates to low and high prices for the given period, depending on the price movement, showcasing support and resistance levels. Candlestick wick may also indicate negative or positive trending, showing the relationship between supply and demand.
Open/Close in Candlestick Charts
A special emphasis is placed on the relationship between open and close price that altogether defines candlesticks. In cases where the close price would be higher than open price for the given time period, the candlestick body would be coloured in green or left blank (white), indicating a bullish momentum in the market, whereas a close price lower than the open price for the given trading session would produce a red-coloured candlestick, or black-coloured in some cases, depending on the chart provider traders are using. Correlation between open and close price in candlestick charts also showcases the dominant trends, which can be either positive or negative. The dominant trend is shown by the shape and colour of the candlestick body where the body is usually coloured in either black or red for negative trends, and green or blank (white) for positive trends.