Candlestick charts can be traced back to technical analysis used by the Japanese. Candlestick charting began to appear sometime in the late 1800’s in a form that is somewhat similar to what is currently used today.
A Candlestick bar is derived from price points that contain an open, high, low and close value for the period needed to display. The body of the candlestick is the hollow or filled portion, which is the middle of the candle. The thin lines above and below the body are the shadows, wicks or tails. The hollow area above and below the wicks represent the difference between the open and the close of a security over the time frame of the bar.
When the opening price of a currency pair closes lower than closing price, the body of the candle is drawn as hollow or in some cases green. It represents a higher close and helps a trader see this upward movement without having to look carefully to see if the close tab is higher than an opening tab as it would in a bar chart. The top of the body is the closing price and the bottom of the body represents the opening price.
If on the other hand the closing price of a currency pair is lower than the opening price, the body of the candle is red. In this situation, the top of the body is the opening price and the bottom of the candle is the closing price.
The most apparent benefit of using candlesticks are the visual aspects and the ease in which traders can make a decision based on opening and closing levels. The relationship between the open and close is considered very important information and candlesticks are very good at representing this relationship.
What Candlesticks Do Not Show
One issue that Candlestick’s do not address is the path at which a bar was created. In essence, Candlesticks do not reflect the sequence of events between the open and close, only the relationship between the open and the close. The high and the low are obvious and indisputable, but candlesticks cannot tell us which came first, or the path and the timing associated with a hollow bar or a red bar.
One way an investor may determine the events that occur is to examine the intra-day movements of the market. There are numerous paths that a market could take to create a hollow or green candlestick where the close is higher than the open. The market could have opened and continued to move higher through the trading day, or it could have opened, move down, then moved up. The timing of the movements is also important. A trader would want to know if the markets rallied slowly throughout the trading session, or prices were squeezed higher in the last few minutes of the trading session. By looking at an intra-day chart, a trader may be able work this out.