How Does a Candlestick Chart Work?
Data visualization has become a key component of decision-making in the business world. While the emphasis has been on proper data management, which is equally as important, there is also a greater need for clarity in presenting pertinent information in a timely fashion. Beyond the standard bar charts and pie graphs, there are other charts that are suited to particular sectors to convey insights and information. One of those is a candlestick chart, intended for demonstrating trends within the financial realm. Let’s take a closer look at what a candlestick chart can convey to decision-makers.
What Is a Candlestick Chart?
A candlestick chart is a financial chart that shows the price movements of currency, securities, or derivatives. It looks like a candlestick with a vertical rectangle and a wick at the top and bottom. The candlestick shows opening and closing prices, while the top of the wick shows the high price, and the bottom of the wick shows the low price. Invented in the 1700s, candlestick charts were designed to show market volatility and trends.
So, how does a candlestick chart work? The “real body” is the rectangular candlestick, showing opening and closing prices in a given time period. If the real body is filled in, that means the close price was lower than when the trading session opened. If it’s open or transparent, that means the close price is higher than the opening. A short upper wick on a day when prices trended downward will show the open price was close to the high price, while a short upper wick on an up day shows the closing price was close to the high price. There’s also a trend known as a doji.
What Is a Doji?
A doji refers to where the body of the candlestick has almost completely disappeared and only a cross remains. There are three main types of doji. There is the dragonfly, where there isn’t a body to the candlestick but a long bottom wick and a minimal top wick. This demonstrates lower prices that have been rejected in favor of higher prices. The gravestone pattern shows a long top wick and short bottom wick, demonstrating a rejection of a higher price over a lower price. Finally, there’s the long-legged pattern, which has two long wicks, meaning uncertainty with no clear trend. These have small real bodies, while a doji doesn’t have a body. If there are many candlesticks on one chart, this tells analysts that there are a variety of trends.
By monitoring these numbers, investors can be aware of not just the current price but what has gone on in a certain time frame. These patterns are related to as bullish or bearish. Bullish patterns show trends that indicate a likelihood of the price rising while bearish patterns dictate decline within certain measurable elements. This can be used through the stock market, cryptocurrency market, or a range of other assets.
Candlestick Chart Patterns
In candlestick charts, there are a variety of patterns including engulfing patterns. An engulfing pattern shows a long, solid real body engulfing a small body to indicate price trends, whether a bullish or bearish trend. There is also the bearish evening star, which keeps the last candle open below the previous day’s small real body. There is the harami pattern, where a small solid body is completely inside the real body from the day before, dictating higher and lower prices based on bullish and bearish trends. This includes a cross pattern that can better highlight trends regarding the price of an asset. By looking at these trading patterns, these data points can reveal plentiful insights and afford reliability in making the right financial decisions for your portfolio.