Watch my latest video below on how to choose a time frame for trading/investing. Know the key factors you'll need to keep in mind when choosing the right time frame for your trading & investment needs.
What are candlesticks?
There are many different kinds of stock charts in use, but Japanese candlesticks are probably the most commonly used by many experts all over the world. This style of charting is considered to have its roots in the Edo-period rice markets of Japan. Historians estimate that they took their present form in the latter half of the Meiji period (late 1800s). Originally, they were just sticks drawn in red or black.
In a daily time frame chart, a single green or red candle expresses price movements for a single day; in a weekly time frame chart a single candle expresses price movements for an entire week. Candlesticks are used even on lower time frames for instance 5 minute charts or 60 minute charts.
The graph below shows different types of red & green daily time frame candles, where each candle represents the price action of a single day.
How to read candlesticks?
A candle consists of two parts, "the real body" & "the shadow". The thick part of the candlestick is called the real body, it represents the range of the stock’s opening & closing. The thin lines above & below the real body are called the shadows. Shadow above the real body is known as the upper shadow & under the real body is called lower shadow. Top price of the upper shadow is the high of session & low price of the lower shadow is the low of the session.
As shown in the diagram below, when the color of the real body is green it means the close of the session was higher than the open. The bottom of the real body is the opening price & the top of the real body is the closing price. The shadows represent the high and low of the session respectively.
If the real body is red it expresses that the close of the session was lower than the open. The top of the real body is the open & the bottom of the real body is the close. As in the earlier example the shadows represent the sessions high and low.
How Candlesticks are drawn?
Let us have a look at how candlesticks are drawn. To draw a daily candlestick you will require the open price, closing price, low & high of that days movement. Let's suppose that intra-day stock prices on a day moved from 9:00 AM to 16:00 PM & produce an upward moving line graph as shown below:
Or a downwards moving graph as shown below :
We can express these above line graphs as candlesticks. A green Candlestick expresses that market has closed above the opening price, in other words closing price of the stock is greater than opening price of the stock. The image below shows the price movement of a positive closing market, where market close is higher than market open, which has been mapped into a green candlestick :
A red candlestick, as in the below image, expresses that the market closed below the price of the opening. In other words opening price of the stock is greater than the closing price of the stock. The image below shows the formation of this price action into a red candlestick :
Candlesticks express stock price movements over a set period of time, either one day or one week or an hour etc. Regardless of the time frame, the shape of the candlestick & its combination with the other candlesticks can be used to identify the market’s direction & its relative strength or weakness & that is the main purpose of the candlestick charts.