Candlestick chart - AbsoluteAstronomy.com

A candlestick chart is a style of bar-chart used primarily to describe price movements of a security

Security (finance)

A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...

, derivative

Derivative (finance)

A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...

, or currency

Currency

In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...

over time.

It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis

Technical analysis

In finance, technical analysis is security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis incorporate technical analysis, which being an aspect of active management stands...

of equity and currency price patterns. They appear superficially similar to error bars, but are unrelated.

History

Candlestick charts are thought to have been developed in the 16th century by Japanese rice trader of financial instruments.. They were introduced to the Western world by Steve Nison in his book, "Japanese Candlestick Charting Techniques".http://candlecharts.com/why-nison-candlesticks.html

Candlestick chart topics

Candlesticks are usually composed of the body (black or white), and an upper and a lower shadow (wick

Candle wick

A candle wick is a string, cord, or wooden object that holds the flame of a candle. A candle wick works by capillary action, drawing the fuel to the flame. When the liquid fuel, typically melted candle wax, reaches the flame it then vaporizes and combusts. The candle wick influences how the...

): the area between the open and the close is called the real body, price excursions above and below the real body are called shadows. The wick illustrates the highest and lowest traded prices of a security during the time interval represented. The body illustrates the opening and closing trades. If the security closed higher than it opened, the body is white or unfilled, with the opening price at the bottom of the body and the closing price at the top. If the security closed lower than it opened, the body is black, with the opening price at the top and the closing price at the bottom. A candlestick need not have either a body or a wick.

To better highlight price movements, modern candlestick charts (especially those displayed digitally) often replace the black or white of the candlestick body with colors such as red (for a lower closing) and blue or green (for a higher closing).

Candlestick patterns

In addition to the rather simple patterns depicted in the section above, there are more complex and difficult patterns which have been identified since the charting method's inception. Complex patterns can be colored or highlighted for better visualization.

Candlestick charts also convey more information than other forms of charts, such as Open-high-low-close chart

Open-high-low-close chart

An open-high-low-close chart is a type of chart typically used to illustrate movements in the price of a financial instrument over time. Each vertical line on the chart shows the price range over one unit of time, e.g. one day or one hour...

s. Just as with bar charts, they display the absolute values of the open, high, low, and closing price for a given period. But they also show how those prices are relative to the prior periods' prices, so one can tell by looking at one bar if the price action is higher or lower than the prior one. They are also visually easier to look at , and can be coloured for even better definition. Rather than using the open-high-low-close for a given time period (for example, 5 minute, 1 hour, 1 day, 1 month), candlesticks can also be constructed using the open-high-low-close of a specified volume range (for example, 1,000; 100,000; 1 million shares per candlestick).

Use of candlestick charts

Candlestick charts are a visual aid for decision making in stock, foreign exchange, commodity, and option trading. For example, when the bar is white and high relative to other time periods, it means buyers are very bullish. The opposite is true for a black bar.

Heikin Ashi candlesticks

Heikin-Ashi (平均足, Japanese for 'average bar') candlesticks are a weighted version of candlesticks calculated with the following formula:

Open = (open of previous bar+close of previous bar)/2
Close = (open+high+low+close)/4
High = maximum of high, open, or close (whichever is highest)
Low = minimum of low, open, or close (whichever is lowest)

Heikin-Ashi candlesticks must be used with caution with regards to the price as the body doesn't necessarily sync up with the actual open/close. Unlike with regular candlesticks, a long wick shows more strength, whereas the same period on a standard chart might show a long body with little or no wick. Depending on the software or user preference, Heikin-Ashi may be used to chart the price (instead of line, bar, or candlestick), as an indicator overlaid on a regular chart, or as an indicator plotted on a separate window.

External links

Candlestick Pattern Screener

Tutorial of 16 Candlestick patterns with charts and explanations
Candlestick chart example at amcharts.com