Candlestick chart analysis is a key component of technical analysis. It is used to spot past price action patterns to forecast where a price may move.
Find out more about how to conduct candlestick chart analysis on this blog!
What is a candlestick chart?
A candlestick chart shows you several things: the opening and closing prices of each time period, and how price moves over a certain period of time.
This is what a candlestick chart looks like:
Traders will use candlestick charts to draw support and resistance level and to spot price action patterns. You can switch between daily, weekly, monthly and yearly views on a candlestick chart.
When spotting patterns, the idea is to work from the bigger picture, so firstly you should spot patterns (by drawing support and resistance levels) on the monthly chart, and then see if this pattern is replicated in the daily chart. Only once you have this confirmation you should make any significant buying/selling decisions!
What is a candle?
A candlestick chart is made up of - you guessed it - candles of two different colours (though it’s worth noting these colours might change depending on the chart settings you have):
- Green/white candle: the closing price was higher than the opening price (bullish)
- Red/black candle: the closing price was lower than the opening price (bearish)
Candles show the low, high, open and close prices of the time period specified.
You can see some key differences between the two candles here:
|Green/white candle||Red/black candle|
|Closing price higher than the opening price||Opening price higher than the closing price|
|The open price is at the bottom and the closing price is at the top of the candle body (the open price depicts the first price traded during the formation of the new candle. If the price starts to trend upwards throughout the period of time, the candle will turn green)||The open price is at the top and the closing price is at the bottom of the candle body (the open price is the first price traded during the formation of the new candle. If the price declines throughout the period of time, the candle will turn red)|
What is the open price?
The open price is the first price traded at the beginning of the new candle. If the price increases, the candle will turn green; if it decreases, the candle will turn red.
What is the closing price?
The closing price is the last price traded at the end of the time period of the formation of the candle. If this price is below the open price, the candle will turn red. If it is above the open price, the candle will turn green.
What does a candle’s body mean?
If a candle has a long body, this indicates there has been a lot of buying or selling in the time period. Short bodies indicate very little buying or selling activity.
What a candle signifies is also impacted by its colour: long green (or white) candlesticks suggest that there has been strong buying pressure: the close is far above the open, which means prices increased significantly over the time period.
However, long red (or black) candlesticks suggest that there was strong selling pressure: the close price is far below the open, which means prices decreased significantly over the time period.
What do the candle wicks mean?
The candle wicks (or shadows) signify the highest and lowest prices traded during that time period (for example, looking at a daily chart, the highest or lowest price that day).
If there is no candle wick, this means that the lowest or highest price was also the opening or closing price (so the wick would be hidden in the candle’s body).
How can you use candlestick chart analysis?
There are many ways to use candlestick charts to spot price patterns. These are two of the most common patterns that you can use to help you in your trading:
Bearish engulfing pattern
A bearish engulfing patterns occurs in an uptrend when sellers outnumber buyers. So - what does this look like on a chart? You might see a long red candle engulfing a small green candle, which means that the price could continue to decline.
Bullish engulfing pattern
This is the opposite of a bearish engulfing pattern. A bullish engulfing patterns occurs in a downtrend when buyers outnumber sellers. On the chart, you might see a long green candle engulfing a small red candle, which means that the price could continue to increase.