Candlesticks
What is a Candlestick?
A candlestick is a visual representation of price movements over a specific period of time. Each candlestick has three main components: the body, the upper shadow (or wick), and the lower shadow (or tail). The body of the candle represents the range between the opening and closing prices for the chosen time period. If the body of the candle is filled in, it indicates that the closing price was lower than the opening price, while if the body is empty or white, it means that the closing price was higher than the opening price.
The upper shadow shows the highest price reached during the period, while the lower shadow indicates the lowest price. The shadows allow traders to see the maximum and minimum price values during the selected time interval.
How Are Candlesticks Constructed?
Candlesticks are constructed based on price data collected over a chosen period of time, such as 1 minute, 5 minutes, 1 hour, 1 day, and so on. For each selected time period, a candlestick is plotted to reflect the price data for that interval.
For example, if we choose a 1-hour interval, each candlestick on the chart will represent price data for each hour of trading. The body of the candle will display the opening and closing prices for that hour, while the upper and lower shadows will show the maximum and minimum prices for that period.
How to Use Candlesticks in Trading?
Candlesticks can be used to analyze price movements and forecast future trends. For instance, if the chart shows many candlesticks with filled bodies pointing upwards, it may indicate an upward trend, while if there are many candlesticks with filled bodies pointing downwards, it may indicate a downward trend.
Moreover, different candlestick patterns, such as "hammer" or "morning star," can indicate reversals or continuations of trends, making them useful tools for making decisions about entering or exiting positions.