Candlestick Chart

Definition of Candlestick Chart

What is a candlestick chart?

One of the more effective charts for tracking what the price of a financial instrument has been doing, and to indicate what it is likely to do in the foreseeable future is the candlestick chart.  Each candlestick is a rectangular block that represents a particular time period of trading for the asset. Day traders generally use charts in which the candlesticks represent 1- or 5-minutes, while long-term traders are more likely to measure with candlesticks that represent daily, weekly, or even monthly periods.  Analysts and traders are able to gather all of the raw data they need about how an asset price behaved in a given time period.

If the candlestick is green or white, the asset price rose during the time period, with the bottom of the colored rectangle representing the opening price, and the top representing the closing price. A red or black candlestick means that the asset price fell, with the top representing the opening price and the closing price at the bottom of the rectangle.  A long rectangle indicates that there was a great deal of price movement on the asset, while a smaller, shorter candle indicates that traders were not particularly active on the asset during the time frame in question. At the top and bottom of the rectangle are straight lines, known as wicks, or shadows. The upper wick represents the highest point the price reached during the trading period, and the bottom wick shows the lowest that it reached. The length of each wick, combined with the size of the rectangle, provides insight as to how the trading went during the session.

For example, a long upper wick would show that buyers controlled trading for much of the session, driving the price up, before giving in to the sellers who were able to bring the price down by closing time.

How do forex and CFD traders use a candlestick chart?

Traders and analysts use the candlestick chart to recognize movements and trends trading in a stock price, and, together with other technical tools, attempt to discern how the price will move in the coming sessions, and to predict if and when it will reverse its direction. Accurate predictions help traders to decide when the best time is to buy or sell their shares for maximum profit, or when to best cut their losses.

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