InvestorQ : What exactly are candlesticks and how is it used in trading?
Abhisha Yadav made post

What exactly are candlesticks and how is it used in trading?

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Bhavika Nehru answered.
1 year ago

Candlestick charting is the probably the most commonly used method of depicting price movement on a chart. A candlestick is formed from the price action during a single time period for any time frame. Each candlestick on an hourly chart shows the price action for one hour, while each candlestick on a 4-hour chart shows the price action during each 4-hour time period. Candle sticks are only relevant from one-hour chart onwards. For 15 minute charts, the time frame may be too short to really be able to create candle stick. The candlestick needs an open point, high point, low point and the close point to be really meaningful.

How exactly are Candlesticks formed? In modern technical analysis, you don’t need to do these things manually. There are sophisticated software packages to take care of these things. Let us look at a practical illustration. The highest point of a candlestick shows the highest price a security traded at during that time period, and the lowest point of the candlestick indicates the lowest price during that time. As we said earlier, the candlestick is relevant only when there is a minimum of 1-hour time frame that is used.

Once the top and the bottom of the candle are identified, next we come to the “body” of a candlestick (the respective red or blue “blocks”, or thicker parts, of each candlestick on the charts). This indicates the opening and closing prices for the time period. If a blue candlestick body is formed, this indicates that the closing price (top of the candlestick body) was higher than the opening price (bottom of the candlestick body). On the other hand, if a red candlestick body is formed, then the opening price was higher than the closing price.

Candlestick colours are arbitrary choices. Some traders use white and black candlestick bodies (this is the default colour format, and therefore the one most commonly used); other traders choose to use green and red, or blue and yellow. Whatever colours are chosen, they provide an easy way to determine at a glance whether price closed higher or lower at the end of a given time period. Remember, that a candlestick chart is an alternative to the bar chart, with better visual representation. Technical analysis using a candlestick charts is often easier than using a standard bar chart, as the analyst receives more visual cues and patterns. The use of colours and smooth circles are more visually appealing and also it is easier to take investment and trading decisions based on such cues, especially as you need to look at multiple variable sets. Candlesticks are the most common used technique for traders and also for chartists.