Candlestick charts are rectangular in shape, similar to that of a candlestick, which have been popular for hundreds of years thanks to Japanese traders. Candlesticks depict a wave of price movement over a specified period of time to determine chart patterns using 4 major components:
- Open price
- Close price
- Low price
- High price
Understanding these price movements helps traders understand the market sentiment regarding a financial instrument, and can aid in making well informed predictions about the direction a stock price will be heading in the future.
Each candle has a wide section called the candlestick body, and traders use the color of the candlestick body to determine if the final price is higher or lower than the starting price at that candlestick. When the closing point of the candlestick has a higher price than the starting price point, the body color of the candle becomes green or hollow, which is also known as an ascending candlestick and is in favor of traders holding a long position. If there is a trend of ascending candlesticks, this can indicate a bullish pattern, and that price is likely to rise.
Likewise, when the closing point of the candlestick is lower than the starting price point, the body color of the candle becomes red or solid, which is known as a downward candlestick, and is in favor of traders holding a short position. If there is a trend of downward candlesticks, this can indicate a bearish pattern, and that price is likely to fall. Of course, this color scheme is applied by default in certain trading software, but if someone wants to personalize the color scheme, this possibility is typically available.