Candlestick charts have remained popular among traders because of the wide range of trading data they give, as well as their simple to read and interpret design.
This centuries-old charting approach originated in Japan's rice markets. Each time period is represented by a rectangle with lines coming out of the top and bottom, as the style's name suggests. This form resembles a wick on a candle. The wick-like lines were referred regarded as shadows by Japanese market observers who adopted this design.
Each candlestick on the chart represents the open, high, low, and close price for the time period selected by the trader. If the time frame is set to five minutes, for example, a new candlestick will be made every five minutes. The open and close prices on an intraday chart like this one are for the beginning and end of the five-minute period, not the trading session.
Candlesticks also display the current price as they develop, as well as whether the price moved up or down over the time frame and the price range the asset spanned during that period.
The open price will be represented by the top or bottom of the candle body, depending on whether the asset moves higher or lower over the five-minute period. The candlestick is normally green or white, with the open price at the bottom, when the price is heading higher. The candlestick will most likely be red or black, with the open price at the top, if the price is declining.
The top of the shadow or tail above the body indicates the high price during the candlestick phase. There will be no upper shadow if the open or close price was the highest.
The bottom of the shadow or tail under the body is indicated to the bottom. If the open or close price was the lowest, there will be no lower shadow.
The top (for a green or white candle) or bottom (for a red or black candle) of the body indicates the last price transacted during the candlestick.
As the price moves, the shape of the candle changes. The open remains constant, while the high and low values change as the candle progresses. The colour of a candlestick may also change as it grows. If the current price was above the open price but subsequently dropped below it, it may go from green to red.
When the candle's time period expires, the last price is the close price, the candle is closed, and a new candle begins to form.
The colour and location of the candlestick reveal the direction in which the price moved within the time frame of the candle. If the candlestick is green, the price closed higher than when it first opened, and this candle will be above and to the right of the previous one, unless it is shorter and of a different hue. If the candlestick is red, the price closed lower than when it first opened, and this candle will be below and to the right of the previous one, unless it is shorter and of a different hue.
The price range is defined as the distance between the top of the higher shadow and the bottom of the lower shadow within the candlestick's time period. The range is determined by subtracting the low and high prices.
Opening a virtual trading account or playing around with candlesticks on free web-based charting tools are also good ways to practise interpreting candlestick charts. Set the chart type to candlestick and the time frame to one minute so you can see a lot of candles.
You can start looking for trade opportunities based on candlestick patterns like the three black crows and the abandoned baby after you grasp what each candle is suggesting.