Candlesticks are THE MOST ADVANCED form of charts available out there. They were introduced by the Japanese back in 17th century. There are different variations of these Candlestick charts which we shall over in later chapters but for now, we will give you a general explanation.
As said, it is the most advanced form of chart available for technical analysis, you may straightaway think that it will be difficult to understand. On the contrary, it easy, rather easier than Tick Charts we have studied. Candlesticks can give you way more information that you can ever expect. The chart are always color coded and hence, they are very easy to remember.
In order to draw a Candlestick chart for any given time frame that you want to analyze, you will always need four price type – OHLC (Open, High, Low and Close). A typical candlestick will look like this:
What you can see on the above image is one white block and one black block with two thin lines protruding out on either side of the blocks. The white block is not actually white. It is hollow. In other words, the area inside the rectangle with black borders is empty. Some charts may show this as a rectangle with green borders and leave the inner area as white to represent it as an empty block or simply fill the entire block with green. The black one represents that the area inside in not empty and hence, filled with black color. Some may use red to fill up the area.
The hollow or the filled block is called the Real Body. The thin lines protruding out on either side are called shadows. The one that protrudes up is called Upper Shadow and the one that protrudes down is called Lower Shadow. The Upper Shadow is known as the Wick of the Candle, the Lower Shadow is called the Tail of the Candle.
What represents what?
In case of the hollow block, the bottom of the block represents the opening price of the asset. The top of the block represents the closing price of the asset. Some may use a completely filled green box to represent this.
In case of the filled block, the bottom of the block represents the closing price of the asset and the top of the block represents the opening price of the asset. Some may use a completely filled red box to represent this.
The top point of the Wick or the Upper Shadow will always represent the High price and the bottom point of the Tail or the Lower Shadow will always represent the Low price irrespective of the Real Body (hollow or filled block).
When are hollow and filled blocks used?
Hollow represents Bullish sentiment while Filled represents Bearish sentiment. When the closing price is higher than the opening price, the market is Bullish and hence, the asset will be represented by a Hollow block. When the closing price is lower than the opening price, the market is Bearish and hence, the asset will be represented by the Filled block.
So, what we learned here is that interpretation of a Candlestick is very easy. You can at once understand the price status for an asset in any given time period. Other very important and crucial information start appearing when we start learning the different variants of Candlesticks used. For the time being we will settle here and take one final look at a complete Candlestick Chart:
A different color version: