Candlestick chart

Quick definition

A candlestick is a type of financial price chart used to describe the high, low, open, and closing prices of an asset for a specific time period. 

Key details

• Candlesticks display four important pieces of price information of a security over a set period of time (high, low, open, and close). 
• They are used in technical analysis and are a way for traders to analyse potential price movements based on historical patterns. 
• Candlestick charts are among the most commonly used by retail traders and can be applied to all financial instruments. 

What is candlestick chart?

It is a financial chart that shows specific price information for a security over a predefined period of time. Candlesticks show the securities high, low, open, and closing prices. Each candlestick represents a time period which is chosen by the trader. These time periods can range from anywhere between 1 minute, to 1 one year or more. 

Candlestick charts are favoured by most traders and are commonly used as part of technical analysis and day trading strategies. They are graphical illustrations of price movements and work in similar ways to many other charts. The vertical y-axis represents price and the horizontal x-axis represents time. 

In the image below a candlestick chart is shown on the left. The chart has been set to the daily timeframe meaning every candle represents one full days worth of trading activity. On the right we have show a bullish and bearish candlestick with the key information they show.

1. Body. The long rectangle between the open and close price is known as the body. It signifies the instrument’s trading range for a specific period of time. 
2. Open. This is the price at which the candle opened. A new open price is shown every time a new candle is printed according to the time frame. 
3. Close. This is the price at which the candle closed. A new close price is shown every time a new candle is printed according to the time frame. 
4. High. The highest price reached during the time period is shown by an upper wick. Wicks are often used when analysing candlestick patterns. 
5. Low. The lowest price reached during the time period is shown by a lower wick. The size of a wick is an important tool during technical price analysis. 

Candlestick chart patterns

Traders using candlestick charts are able to use historical information to determine future price movements. A way in which this can be done is by analysing candlestick patterns. There are lots of patterns from single candles, to multiple candles and below we’ve listed a few of the top ones. 

• Pin Bar. This is a single candle pattern and is used as a way to identify market turning points or reversals. They have small bodies and long wicks and resemble the shape of a pin. They’re sometimes referred to as hammers or shooting stars. 

• Doji. This is another single candle pattern and is a way for traders to identify uncertainty in price. They resemble a plus sign and have a small body where the open and close prices are almost the same. 

• Engulfing. An engulfing pattern requires two candles for it to be identified. It’s a way to analyze market turning points and is usually found at the end of a trend. The first candle is usually a small-bodied one, followed by a larger one that engulfs it (its body is larger than the high and low of the previous candle). 

• Tweezers. Another two candle pattern is known as the tweezers and signals a reversal in price. It is most effective at the end of a trend and consists of two smaller bodied candles with wicks of similar size that have touched the same point twice.  

Where can I learn more?

For more information about candlestick charts and other investing or trading concepts, you can check out our full course page. We have free courses available teaching you about stocks, commodities, forex, and crypto.