Candlestick charts, which originated in Japan, are popular with some traders and investors. They represent a wide-range of information, are easy to read and easy to interpret. The chart itself consists of a body that looks like the fat part of a candle. It typically has a tail or wick on both ends.
Each candlestick reveals an opening price, closing price, a high and a low price for the given time frame. The time frame for each candle is set by the trader or investor. If the time frame is 5 minutes, then every 5 minutes a new candle is created that shows all the information listed above. If the time frame is a trading day, each candlestick represents the entire trading day.
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The open, which shows the opening price (in relation to all other data) is indicated by either the top or bottom of the body, depending on which direction prices went during that candlestick. The color of the body of the candlestick indicates whether movement during the period went up (green or white) or down (red or black).
The high is the highest price traded during the candlestick, and is indicated by the top of the tail that occurs above the body (called the upper tail). If the opening price was the highest price paid, then there will be no upper wick (or tail).
The low is the lowest price at which a security traded during the candlestick, and is indicated by the bottom of the wick below the body. If the open was the lowest price during the candlestick, there will be no lower tail
The close is the last price traded during the candlestick. It is shown by either the top or bottom of the body, depending on the direction trading went during that period. While the candle is still forming (before the period is over) the candle (including color) will change as the price moves (up or down). The opening price never changes, but the high, low and close could all change multiple times.
After the period, the candlestick adopts a final color and length (representing the range of movement from open to close. If the range (candle length) is long, there was a lot of volatility during the period. If the range is short, the trading was complacent. It’s easy to look at a series of candlesticks and see how price movement changed over time – which could be a day, a week, a month or more.
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Candlesticks Versus Bar Charts
One big difference between candlestick charts and bar charts is the relationship between opening and closing prices of a security. Bar charts tend to compare today’s closing price to yesterday’s. A candlestick compares the opening and closing price of the same trading day (or whatever time is represented by a single candlestick).