Candlestick Chart Explained

A candlestick chart is an effective tool used in trading. It is very good at representing price movement over time.

Candlesticks

A candlestick is compromised of two parts: a body and the wicks.

The Body

The body shows us both the open price and the closing price of a particular period. Although many trading platforms allow you to customize the color to anything you’d like, the typical colors used are Green for upward movement and Red downward. Historically, White for up and Black for down price movements. These bodies can also be rectangles full of solid color or empty rectangles — this depends on how you customize and prefer to see it.

Seeing Movement Direction

The bottom of a green candle body shows us the opening price of the period. The top edge of the green body represents the closing price.

The top of a red candle body shows the opening price of the period and the bottom edge of the body represents the closing price of that period.

This makes it easy to instantly see the price movement over the course of a period. If it’s green, it ended higher than it started. If it’s red it ended the period lower than it opened.

Period of a Single Candlestick

I keep saying that each candle represents a period, because when navigating your charting tools you can easily change your timeline for what each candle represents.

For example, you can set your chart to show the full trading Year with each candle stick representing the course of a single Day (shown as “1Y:1Day”).

Doing this will allow you to see whether price movement was upward or downward and by how much.

Similar to a 1 Year: 1 Day chart, you can change it to almost anything. Examples are

  • 1Day:1 Minute
  • 1Day:5Min
  • 5Days:15 Minute
  • 30 Days:15 Min
  • 90Day: 4 hours
  • 1 Year:1 Week
  • 15 Year:1 month

This allows you to see a full time frame, with each candlestick depicting the price movement within the period. The choice of time is your decision depending on what you’re trying to see.

Wicks

There are two wicks on each candle body. One on top, and one of the bottom. The wicks show you maximum and minimum price for that period.

Example

Think of it this way where a candle is representing 1 day:

  • 8:00 AM, price of XYZ stock opens trading at $100.
  • 8:46 AM, XYZ stock price falls to the lowest price of the day, $96.
  • 12:33PM, XYZ stock price sees a massive increase to a high of $110.
  • 2:00 PM, at market close, XYZ stock price ends the day at $104.

The price closed higher than it opened trading at, so it will be green.

The bottom of the green body will be at $100, the top of the body is $104.

The wicks show the low and high of that day. The bottom wick will stretch from the bottom of the body to $96. The upper wick reaches to $110 from the top of body.

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About the author: Dominick Muniz
Creator, web-developer, and writer at The Trading Space.

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