What Are Candlesticks?
Candlesticks are price charts that show the movement of a security, derivative, or currency. They represent a financial asset’s high, low, open, and closing prices for a specific period.
A candlestick displays information about the price movement of a financial asset. Each candlestick represents a specific interval which typically could be minute-long, hourly, daily, or weekly. Traders use the information presented by the candlestick charts of a financial asset to conduct its technical analysis.
Candlesticks are visual representations of investors’ sentiment on a financial asset’s prices. Often, traders use them alongside other tools to quickly predict possible future trends. There are three essential features of a candlestick:
- Body: It represents the difference between an asset’s opening and closing prices over a specific period.
- Wick or Shadow: This represents the highest and lowest prices at which a security is traded over a specific period.
- Colour: It represents the direction of market movement over a specific period, i.e., green (or white) shows a price increase, red (or black) shows a price decrease.
Over time, candlesticks form patterns that traders can use to determine when to enter and exit trades. For instance, by looking at a candlestick chart, traders can recognize significant support and resistance levels, combining with other forms of technical analysis to trade an asset.
There are several candlestick patterns, and each represents market forces over a period. For instance, when looking at an hour chart of Bitcoin, each candlestick represents how Bitcoin traded within an hour.
Some examples of candlestick patterns are:
- Hammer: This candlestick pattern takes the shape of a short body with a long lower wick. It shows that although there was initially a sell-off, there was an intense buying pressure that drove the price back up.
- Inverse hammer: This is the opposite of a hammer, and it takes the shape of a short body with a long higher wick. It shows that although there was initially intense buying pressure, the asset closed with a sell-off.
- Doji: This looks like a cross sign, and it shows that a security’s opening and closing price over a period was almost the same.