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Candlestick chart

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Scheme of a single candlestick chart. A candlestick as this one is usually shaded red as the close is lower than the open. The Low and High caps are usually not present but may be added to ease reading.
An hourly candlestick shown with order book depth on a currency exchange.

A candlestick chart (also called Japanese candlestick chart or K-line[1]) is a style of financial chart used to describe price movements of a security, derivative, or currency.

It is similar to a bar chart in that each candlestick represents all four important pieces of information for that day: open and close in the thick body; high and low in the “candle wick”. Being densely packed with information, it tends to represent trading patterns over short periods of time, often a few days or a few trading sessions.[2]

Candlestick chart of EUR/USD currency pair on daily timeframe in MetaTrader 5 trading platform.

Candlestick charts are most often used in technical analysis of equity and currency price patterns. They are used by traders to determine possible price movement based on past patterns, and who use the opening price, closing price, high and low of that time period.[3] They are visually similar to box plots, though box plots show different information.[4]

History

Candlestick charts are thought to have been developed in the 18th century by Munehisa Homma, a Japanese rice trader.[5] They were introduced to the Western world by Steve Nison in his book Japanese Candlestick Charting Techniques, first published in 1991. They are often used today in stock analysis along with other analytical tools such as Fibonacci analysis.[6]

In Beyond Candlesticks,[7] Nison says:

However, based on my research, it is unlikely that Homma used candle charts. As will be seen later, when I discuss the evolution of the candle charts, it was more likely that candle charts were developed in the early part of the Meiji period in Japan (in the late 1800s).

Description

The area between the open and the close is called the real body, price excursions above and below the real body are shadows (also called wicks). Wicks illustrate the highest and lowest traded prices of an asset during the time interval represented. The body illustrates the opening and closing trades.

The price range is the distance between the top of the upper shadow and the bottom of the lower shadow moved through during the time frame of the candlestick. The range is calculated by subtracting the low price from the high price.

If the asset closed higher than it opened, the body is hollow or unfilled, with the opening price at the bottom of the body and the closing price at the top. If the asset closed lower than it opened, the body is solid or filled, with the opening price at the top and the closing price at the bottom. Thus, the color of the candle represents the price movement relative to the prior period's close and the "fill" (solid or hollow) of the candle represents the price direction of the period in isolation (solid for a higher open and lower close; hollow for a lower open and a higher close). A black (or red) candle represents a price action with a lower closing price than the prior candle's close. A white (or green) candle represents a higher closing price than the prior candle's close. In practice, any color can be assigned to rising or falling price candles. A candlestick need not have either a body or a wick. Generally, the longer the body of the candle, the more intense the trading.[6]

In trading, the trend of the candlestick chart is critical and often shown with colors.

Candlesticks can also show the current price as they're forming, whether the price moved up or down over the time phrase and the price range of the asset covered in that time.

Rather than using the open, high, low, and close values for a given time interval, candlesticks can also be constructed using the open, high, low, and close of a specified volume range (for example, 1,000; 100,000; 1 million shares per candlestick).[citation needed] In modern charting software, volume can be incorporated into candlestick charts by increasing or decreasing candlesticks width according to the relative volume for a given time period.[8]

Usage

Candlestick charts are a visual aid for decision making in stock, foreign exchange, commodity, and option trading. By looking at a candlestick, one can identify an asset's opening and closing prices, highs and lows, and overall range for a specific time frame.[9] Candlestick charts serve as a cornerstone of technical analysis. For example, when the bar is white and high relative to other time periods, it means buyers are very bullish. The opposite is true when there is a black bar.

A candlestick pattern is a particular sequence of candlesticks on a candlestick chart, which is mainly used to identify trends.[citation needed]

Heikin-Ashi candlesticks

Heikin-Ashi (平均足, Japanese for 'average bar') candlesticks are a weighted version of candlesticks calculated in the following way: [10]

  • Close = (real open + real high + real low + real close) / 4
  • Open = (previous Heikin-Ashi open + previous Heikin-Ashi close) / 2
  • High = max(real high, Heikin-Ashi open, Heikin-Ashi close)
  • Low = min(real low, Heikin-Ashi open, Heikin-Ashi close)

The body of a Heikin-Ashi candle does not always represent the actual open/close. Unlike with regular candlesticks, a long wick shows more strength, whereas the same period on a standard chart might show a long body with little or no wick.[11]

Relationship to box plots

Candlestick chart are similar to box plots. Both show maximum and minimum values. The difference between them is in the information conveyed by the box in between the max and min values.

References

Wikimedia Commons has media related to Candlestick charts.
  1. ^ Tao, Lv; Hao, Yongtao; Yijie, Hao; Chunfeng, Shen (2017). "K-Line Patterns' Predictive Power Analysis Using the Methods of Similarity Match and Clustering". Mathematical Problems in Engineering. 2017: 1–11. doi:10.1155/2017/3096917.
  2. ^ Grant, Mitchell. "Understanding Japanese Candlestick Charts". Investopedia. Retrieved 22 October 2019.
  3. ^ "Understanding a Candlestick Chart". Investopedia. Retrieved 2022-09-10.
  4. ^ Patel, Ravi (1 January 2010). Guide To Technical Analysis & Candlesticks. Buzzingstock Publishing House. ASIN B00GZMSEDM.
  5. ^ Gregory M., Morris (2006). Candlestick Charting Explained: Timeless Techniques for Trading Stocks and Futures. McGraw-Hill. ISBN 9780071461542.
  6. ^ a b Nison, Steve (2001). Japanese Candlestick Charting Techniques (2nd ed.). Prentice Hall Press. ISBN 9780735201811.
  7. ^ Nison, Steve (1994). Beyond Candlesticks: New Japanese Charting Techniques Revealed. John Wiley & Sons. ISBN 9780471007203.
  8. ^ "CandleVolume [ChartSchool]". Stockcharts. Retrieved 22 October 2019.
  9. ^ Lu, Tsung-Hsun; Shiu, Yung-Ming; Liu, Tsung-Chi (2012-04-01). "Profitable candlestick trading strategies—The evidence from a new perspective". Review of Financial Economics. 21 (2): 63–68. doi:10.1016/j.rfe.2012.02.001.
  10. ^ Mitchell, Cory. "Heikin-Ashi technique". Investopedia. Retrieved 18 August 2020.
  11. ^ "Heikin-Ashi Technique Definition and Example". Investopedia. Retrieved 2022-09-10.
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