Each day, new traders enter the market with the hope of financial independence and exponential market returns. As traders become more embedded in the market and familiar with the tools to assess it, they will inevitably come across Candlestick Charts.
Candlestick Charts are an asset price chart that shows the open, close, high and low price of an asset within a given time frame. It is a way for traders to quickly gather and interpret the pricing of an asset in the past, thereby informing their outlook on the future. But for those new traders that are just entering the market, interpreting these charts may be a challenge. What do the boxes mean? Why are some read and others green? What are those lines above and below?
Before understanding how to conduct technical analysis with Candlestick Charts, new traders must first understand the components of the charts themselves.
The above image demonstrates the essential components of a candlestick chart. The candlestick on the left shows an asset that has increased in value (green), while the candlestick on the right shows an asset that has decreased in value (red), within a given time frame.
With this in mind, it already becomes easier to understand the chart. Knowing that the green “real body” shows an asset that is appreciating, we can see that the open price (the bottom of the green rectangle) is the price of the asset at the start of the time frame, while the close price (top of the green box) is the price of the asset at the end of the time frame.
The opposite is true for an asset that is decreasing in value, which is shown with a red “real body” box. Because the price of that asset has decreased in the time frame, the top of the box shows the price at the start of the time frame, while the price at the bottom of the box shows the price at the end of the time frame.
Both the green and red boxes allow traders to quickly see what the price of an asset was at both the beginning and end of a time frame. But what do those thin lines on top and bottom of the "real body" boxes represent?
Once again, it is important to remember that the red and green boxes represent the price at the beginning and end of a time frame. However, within that time frame, the price of the asset may have gone higher or lower than the price at the end. The lines on top of both red or green real body boxes display the highest price for that asset within the time frame, while the line on bottom displays the lowest price for the asset within that time frame.
Knowing how to read an interpret a candlestick chart is a first step to becoming a more informed, sophisticated and efficient trader.
