What is Candlestick Chart?
What is Candlestick Chart
Candlestick chart can be defined as an advanced price chart tool that combines price data of investment instruments in any period and visualizes them as candlesticks. Candlestick charts simplify price data in the relevant time period and turn them into meaningful summary boxes. In this article, you can find answers to questions such as what is a candlestick chart, how to read it, what are the advantages of using it, and what are the main candlestick chart models.
What is Candlestick Chart?
Candlestick charts consist of candlesticks that summarize and visualize the price movements of any asset over a certain period of time. Candlesticks consist of a box called the body and lines called shadows or wicks above/below the body. By combining the body and the wick, a candle-like shape is formed. Hence, such price bars are called candlesticks.
Any candlestick can be described as a visual summary of information such as the underlying price levels (opening, closing, high and low price) of the relevant asset within a certain time period, the direction of the movement and the size of its volume. Candle chart is defined as an advanced price chart tool consisting of a set of candlesticks.
How to Read Candlestick Chart?
The horizontal axis of the chart shows the time range, and the vertical axis shows the price levels. The candlestick consists of two parts: body and shadow/wick.
The body represents the price difference between the opening and closing levels of the underlying asset over a specific time period. Each body corresponds to a period. This period can correspond to any time period. The color of the body shows the direction of the asset in the period in question. If the closing price of the underlying asset within the relevant time period is above the opening price, the body is indicated in white. In this case, the bottom of the body represents the opening price, and the top of the body represents the closing price. On the other hand, if the closing price of the underlying asset within the relevant time period is below the opening price, the color of the body is shown as black. In this case, the bottom of the body represents the closing price, and the top of the body represents the opening price. The color of the body, determined according to the closing price, represents the dominance of buyers/sellers in the relevant period.
The thin lines on the top/bottom of the body are called shadows or wicks. The extreme point of the wick on the body corresponds to the highest price level of the underlying asset within the relevant time period. On the other hand, the extreme point of the wick under the body is the lowest price level of the underlying asset within the relevant time period. Wicks may appear at one or both ends of the stem, or may not occur at all.
Candlestick formations represent various situations in the market. Body size can signal the balance of buying and selling transactions in the underlying asset and the strength of the price movement. However, under normal circumstances, the closing price can be the reference level for the next period. The realization of candles in ongoing periods can signal the trend of the ongoing movement, that is, the direction of the trend.
Wicks, on the other hand, represent the turns of the candle in the time period and serve as the reference price level for the body in the relevant period. Wick size shows the fluctuations and volatility in the asset price. A long upper wick indicates that the price of the asset rose over a period of time, but then pulled back. A long lower wick, on the other hand, indicates that the price of the asset fell over a period of time, but then recovered. The length of the wicks compared to the length of the body can be used to determine a signal for a future price move.
Candlesticks offer investors a simple perspective by presenting basic price levels such as high, low, opening and closing prices in a certain time period. Determine the direction, magnitude, etc. of price movements. It is easy to understand and interpret because it visualizes the dynamics. Investors can get an idea about the trend and psychology of the market by observing the color and size of any candle, in other words, the interaction between buyers and sellers.
On the other hand, candlestick charts can also be used for technical analysis purposes. Candlestick formations determine the trend, strength, direction, market psychology, etc. of the relevant asset according to the arrangement and shape of the candlesticks. It tries to identify signals regarding dynamics. Candlestick patterns serve as a complement to other tools in technical analysis, such as chart patterns and indicators.
What are the Types of Candlestick Charts?
There are various formations to interpret the arrangement and shapes of candlesticks. Hammer, inverted hammer and doji are among the frequently used candlestick formations. Basically, candlestick patterns give signals about the direction of a trend. Formations are divided into two categories: bull and bear formations. In bull formations, the charts tend to be upward and it is generally seen that the closing prices are higher than the opening prices. In bear formations, the values on the chart tend to decrease. Closing prices are below opening prices.
Hammer
The hammer pattern is used to describe the situation in a candlestick where the lower shadow is at least twice as long as the body. The logic of the hammer formation is that after the sellers first push the asset price down for a certain period of time, the buyers break the selling pressure and bring the closing price closer to the opening price. The hammer formation, which usually appears after price declines, can signal that the trend may change direction. Even if the Hammer formation is confirmed, investment decisions should not be taken without supporting it with technical analysis methods.
Inverted Hammer
The opposite of the hammer pattern, the inverse hammer pattern is used to describe a situation where the upper shadow of a candlestick is at least twice as long as the body. The logic behind the inverted hammer formation is that after the buyers initially push the asset price up for a certain period of time, the sellers break the buying pressure and bring the closing price closer to the opening price. Like the hammer formation, the inverted hammer formation also appears after price declines and can signal that the trend may change direction. Even if the inverted hammer formation is confirmed, investment decisions should not be taken without supporting technical analysis methods.
Doji Candle Patterns
Shadowed candlesticks, which usually have no body or a very short body and where the opening and closing prices are at the same level, are called doji. Doji patterns may differ depending on the position and length of the shadow.
Doji formation can be interpreted as a signal that buyers and sellers cannot gain the upper hand over each other, in other words, as a signal of indecision in the market or possible reversals in the ongoing trend. Even if Doji candles are confirmed, investment decisions should not be taken without supporting them with other technical analysis methods, especially indicators. There are three main types of doji candle patterns that can be interpreted as a possible signal for an upcoming trend change.
Long Legged Doji
In the long-legged doji pattern, the price, that is, the shadows, extend equally in all directions, and the opening and closing levels at the same point generally occur in the middle of the price range. When long-legged dojis appear after a long-term up or down trend, they can be interpreted as a signal of a trend change in the opposite direction.
Gravestone Doji
The gravestone doji pattern consists of a long upper shadow above the opening and closing levels occurring at the same point. In other words, it has no drop shadow. Tombstone dojis observed in an uptrend may indicate that an attempt to move higher in price levels is being rejected in the market and a possible downward reversal may occur.
Dragonfly Doji
The dragonfly doji pattern consists of a long lower shadow located below the opening and closing levels at the same point. In other words, it has no upper shadow. The dragonfly doji can also be considered as the opposite of the gravestone doji pattern. Dragonfly dojis observed in a downtrend may indicate that an attempt to push prices lower is being rejected by the market and a possible upward reversal may occur.
