Candlestick chart

A candlestick chart is a specialized financial tool used to track price movements. These charts describe the behavior of a security, a derivative, or a currency. They are also known as Japanese candlestick charts or K-lines. Traders use them to perform technical analysis on equity and currency price patterns. By looking at these charts, people try to determine possible future price movements based on past patterns.

Each individual candlestick represents four specific pieces of data for a set time interval. The thick middle section is called the real body. This body shows the opening price and the closing price for that period. Extending above and below the body are thin lines called shadows or wicks. These wicks illustrate the highest and lowest prices reached during the interval. The total price range is the distance between the top of the upper shadow and the bottom of the lower shadow. You calculate this range by subtracting the low price from the high price.

Visual cues like color and fill help readers interpret price changes quickly. If an asset closes higher than it opened, the body is often green or hollow. In this scenario, the opening price is at the bottom and the closing price is at the top. Conversely, if the asset closes lower than it opened, the body is often red or filled. In this case, the opening price is at the top and the closing price is at the bottom. Modern software allows for significant customization of these colors and looks.

There are different ways to display these relationships using hollow candlestick charts. In this version, both fill and color represent different price relationships. Solid candles indicate the current close price is less than the current open price. Hollow candles show that the current close price is greater than the current open price. Additionally, red candles show the current close is less than the previous close price. Green candles show the current close is greater than the previous close price.

The history of these charts is a subject of ongoing research. Some believe they were developed in the 18th century by a Japanese rice trader named Munehisa Homma. However, researcher Steve Nison suggests a different timeline in his book, Beyond Candlesticks. He believes they may have been developed during the Meiji period in the late 1800s. Nison is credited with introducing these techniques to the Western world in 1991. He published this information in his book, Japanese Candlestick Charting Techniques.

Candlestick charts serve as a cornerstone for many different types of trading. They are used in stock, foreign exchange, commodity, and option trading. Traders look for a candlestick pattern, which is a specific sequence of candles. These sequences are used to identify market trends. For example, a white bar that is high relative to other periods suggests buyers are very bullish. A black bar can indicate the opposite sentiment. Some charts even use the width of the candle to incorporate trading volume.

A more complex version of this tool is the Heikin-Ashi candlestick. The name Heikin-Ashi is Japanese for "average bar." These are weighted candlesticks that use specific mathematical formulas to calculate values. The close is calculated by averaging the real open, high, low, and close. The open is calculated by averaging the previous Heikin-Ashi open and close. The high is the maximum of the real high, the Heikin-Ashi open, or the Heikin-Ashi close. The low is the minimum of the real low, the Heikin-Ashi open, or the Heikin-Ashi close.

Because of these calculations, Heikin-Ashi candles behave differently than standard ones. The body of a Heikin-Ashi candle does not always represent the actual open or close prices. In a standard chart, a long body with no wick might show a specific trend. However, in a Heikin-Ashi chart, a long wick can actually show more strength. This mathematical approach helps traders see trends more clearly by smoothing out price movements. These tools connect mathematical formulas with visual patterns to aid financial decision-making.