Over the last few decades, traders have begun to use candlestick charts far more frequently than any other technical analysis tool. Candlestick charts have a simple, easy-to-analyze appearance, and, provide more detailed information about the market at a glance than bar or line charts.
The Benefits of Candlestick Charts
Candlestick charts are one of the most common tools traders use for technical analysis. Most traders prefer to use the candlestick chart because it can help them to:
- Determine the current state of the market at a glance.
Just by looking at the color and length of a candlestick, traders can determine instantly if the market is strengthening (becoming bullish) or weakening (becoming bearish).
- See the direction of the market more easily.
On a candlestick chart, the color and shape of the candlestick can help traders determine if an uptrend is part of bullish momentum or simply a bearish spike.
- Identify market patterns quickly.
Candlestick charts display specific bullish and bearish reversal patterns that cannot be seen on other charts.
Flame on: Candlestick Features
When you open a candlestick chart, you may notice that it looks similar to a bar chart.
Like the bars in a bar chart above, each candlestick on the candlestick chart shows the range of a currency in a vertical line and is defined by four price points: high, low, open and close.
Anatomy of a Candlestick
Each candlestick is made up of a body and two shadows.
The appearance of the candlestick body and its shadows potentially provide a lot of information about the state of the market and where it’s going.
The length of the candlestick body shows where the majority of the trading took place. A long body suggests that the market is trading heavily in one direction, while a small body indicates lighter trading.In our examples, you’ll notice that green candlesticks appear in an “up” candle; in other words, the currency closed higher than the previous candle’s close. Red candlesticks show a “down” candle, indicating that the currency closed below the previous candle’s open. You may also see uptrends represented by white candlesticks and downtrends depicted by black candlesticks.
Examples of long and short bodies and shadows on the daily EUR/USD chart
The appearance of shadows can also tell you which way the market is heading. Long shadows show that trading went far past the open and close values while short shadows indicate most of the trading happened near the open and close. Typically, long shadows signify a big change in market direction while short shadows usually indicate that the market has changed little during the candle’s timeframe.