What is a Candlestick?

One of the most popular forms of analysis and charting of securities is using candlesticks. Candlesticks show the price movement within a certain time-frame such as monthly, weekly daily and even can go as low as minutely, by using the trading time-frame’s open, high, low and close.

A candlestick is composed of a box which is called the body, whose length is the difference between the open and close, and thin vertical lines that are called the shadows or wicks above and below the body, representing the high and low prices reached during the day.

A bullish day with a closing price higher than the opening price is shown by a white (hollow) body; while a bearish day with a closing price lower than the opening is shown by a black body. The body becomes a short horizontal line when the opening and closing prices are equal. In this case the candlestick is called a Doji, which usually signifies indecision in the market.

Within a single candlestick traders can find valuable information about the changes in a market’s supply and demand balance, a succession of candlesticks taken together, are more pertinent for this purpose as they make a pattern.

The superiority of candlestick patterns over other technical analysis tools such as line or bar charts in forecasting medium and particularly short term direction is proven. Forecasting with candlesticks requires the proper identification of more than eighty different patterns and a well behaved continuous set of data with no missing observations. Though the patterns on a chart can be roughly identified by eye, today’s computers can do this job much more quickly and efficiently.