Any new pursuit brings with it an entirely new vocabulary, and the world of trading is no different. Candlestick is a word you’re going to run into a lot, so we’d like to give you a simple explanation of this important symbol. Now that you’re a trader, you’ll never see candlesticks the same way again!
What is the Candlestick?
Candlesticks are visual summaries of price movements. In the early 18th century, a Japanese rice merchant named Munehisa Homma began to keep track of the prices of rice sales in his local market. With these records he plotted charts to help him better understand the effect that price movement had on people’s decision to buy or sell rice. The charts in Homma’s records were the seeds that have since sprouted into modern candlestick charts.
Individual candlesticks represent smaller periods of time within the larger time frame of your chart. For example, if you choose to view a one-hour chart, that means each candlestick on your chart will represent one hour—if you choose a fifteen-minute chart, each candlestick will represent fifteen minutes. The chart you use will depend on the type of trading you do. If you prefer to do lots of smaller trades, you’ll want to use a shorter chart like the one-, five-, or fifteen-minute charts. If you like your trades to last all day, you may find a one- or four-hour chart more useful. It’s up to you!
Elements of the Candlestick
Four pieces of information are contained in a single candlestick: the Open, the Close, the High, and the Low.
The Open is the price at the beginning of the period.
The Close is the price at the end of the period.
The High is the highest point the price reached within the period.
The Low is the lowest point the price reached within the period.
Now you might see why they’re called candlesticks; the high and low lines resemble a wick on a candle. The colors of a candlestick can also quickly relay information about overall price movement. Generally, a green candlestick shows an upward, or bullish, movement. A bullish movement is one in which the close is higher than the open. A red candlestick shows a downward, or bearish, movement—a movement in which the close is lower than the open. The green-red contrast is fairly standard, but you can set these to whichever colors work best for you.
The candlestick has been designed to make it easier for you to see what’s happening on your chart. Now that you understand these important symbols a bit better, you’re that much closer to forecasting price movements and potential market trends! In the next blog post, we’ll discuss reading candlestick charts, noticing trends, and translating that knowledge into successful trading.