what is a candlestick chart

Thankfully most, if not all, charting services construct a Japanese Candlestick chart for us in milliseconds, but it is important to know how it is constructed to help interpret them and what is a candlestick chart.

How a Japanese Candlestick Charting is constructed

Figure 1.1

A Japanese Candlestick chart is made up of three candlesticks that represent three different types of market movement. Those movements are up, down and unchanged. It is very important to understand that each of these candlesticks represents a period of time we designate. When we have an up candlestick, this is typically designated with either a white or sometimes green vertical rectangle. When we have a down movement this is typically designated by a black vertical rectangle (sometimes in red). When the market movement is unchanged the candle will look like a cross. See figure 1.1 for examples of each of these Japanese Candlestick movements.

Candlestick charting

Figure 1.2

So we understand the different type of Japanese Candlesticks, now we will discuss how they are made. The vertical rectangle in both the up and down market moves represent the open and closing price of that time period. When we have a up market movement and therefore a white or green rectangle the bottom of the rectangle represents the open price and the top is the closing price. When we have a down market move the top of the rectangle is the open price and the bottom is the closing price. When the market is unchanged over the period of time designated, the candle forms a cross because the price opens and closes the same forming the horizontal line of the candlestick. The thin lines that come out either the top and or the bottom of the candlestick represent the total range of price movement over that time period also referred to as the shadow. So if the price remained unchanged from the beginning of the time period to the end, the total price range forms either cross or T (or inverted T). Figure 1.2 illustrates the above description.

I hope the above has helped to answer “what is a candlestick chart?”.

Further reading:

Learn more about Japanese Candlestick Charts:
The History of the Japanese Candlesticks Chart
Japanese Candlestick Chart Patterns and how to use them

 

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