How To Read A Candlestick Chart

If you do not yet know how to read a candlestick chart, do not be concerned. Everybody has to start sometime, and candlestick analysis is really very simple. The charts are easy to read at a glance. In fact, it is one of the simplest methods of financial trading analysis. Not surprisingly, it is also the most popular type of financial trading chart.

You may see these charts referred to as Japanese candlestick charts, and that is because they were invented by a Japanese commodity trader named Homma in the 18th century. Before that date, traders had relied only upon simple line charts that tracked only the closing prices. Bar charts were developed to show the open, high and low as well as the close, but Homma's candlesticks did the same thing in a much more visual way.

Homma was a phenomenally successful trader and this meant that his candlestick analysis chart was soon copied by other traders in Japan. Charles Dow, who founded the Wall Street Journal and the Dow Jones Company, brought it over to the USA early in the 20th century.

The regular type of candlestick consists of a block which may be shaded, colored or blank, plus two vertical lines protruding from the top and bottom of the body, known as shadows or wicks.

Each candle represents one time period. Generally you can set this for various options, e.g. one minute, 15 minutes, one hour, one day.

The top of the upper wick is the high for the period. The bottom of the lower wick is the low.

The top and bottom of the candle body show the opening and closing prices (either way around). Traditionally, the candle would be hollow (i.e. white) if the price rose during the period, and filled (black or any color) if it fell. However, some charts now color all of the candles, so that an upward candle is green or blue and a downward candle is red. This sounds confusing but if you just use one charting service, you will soon get accustomed to the way that they show the candles.

Of course, sometimes the open, high, low and close are not all different prices. For example the price might go up and down during the period but then close at the same as the opening price. In this case there is no visible candle body, just a cross, with the upper and lower wicks crossed by a horizontal line at the open/close level. This is called a Doji pattern.

Alternatively, you may see candles that are all body and no wick. In this case, the price moved in one direction from open to close, without exceeding either the opening or the closing price. This is called a marubozu pattern.

The colors and thick bodies of the candlestick chart make it easy to read, cutting down on errors. This is crucial in the fast moving trading environment. Knowing how to read a candlestick chart is important for any trader.