Technical analysis is believed to have originated from 17th century Japan, where it was used in trying to predict the rice markets. Candlestick charts first appeared around 1850, and is also thought to be invented by the Japanese. While its development and refinement has probably happened over some time and with multiple participants, its invention is widely attributed to the legendary rice trader Homma from the town of Sakata. Candlesticks were initially called “Japanese candles” in the west and didn’t become common there until the mid 20th century.
Today the candlestick chart is the default charting system used by stock, forex and not least crypto traders. And for good reason. To the experienced observer, the candlesticks will provide extremely valuable information about where the market is likely going.
A candlestick is made up by 4 points of information about a trading period:
- Opening price
- Lowest price
- Highest price
- Closing price
The main body of the candlestick is displayed as a column that is usually either green or red, depending on whether the market closed above or below the opening price of that trading period. It can also be hollow or filled or other colours, depending on display preferences.
Each candle can have a wick going up or below from the main candle body. The high and low point of the wick displays the maximum and minimum price for that trading period. The columns with wicks coming out bears a resemblance to candles, hence the name of this chart type.
Each candle on the picture represents 15 minutes of trading on the Bitcoin Perpetual Swap asset on the Bitmex exchange. Below you see another line of columns. Those represent the volume traded in each candle. Volume is a vital part of a candlestick chart and shows you the relative strength of a candle compared to the others.
So by looking at each of these candlesticks and the volume below, we get vital information about the trading that went on in that period:
Body size and color
If there was a lot of buying or selling pressure, the candle body will be long. If the market was not moving much, the body will be small or even almost non-existent.
The color of the body is determined simply by wether the market closed above or below the starting price.
If there was a lot of profit taking by the bears, the candle will have a long upper wick. If the bulls were buying up the dip, you’ll see a long lower wick. Sometimes you’ll see long wicks on either side, which indicates that there was fighting, and neither side had the decisive upper hand.
The volume column shows how much trading volume there was in the time represented by the candlestick. Without volume, your candlestick chart would be useless. Because volume is what tells you how important one candlestick is compared to the other ones in the chart. So you can look at volume as a strength gauge or an amplifier for a candlestick. If one candlestick has 3 times as much volume as another one, that candlestick is 3 times more important as a signal about the market trend. The volume column will be the same color as its candlestick.
There are several unique candlesticks types, each with a specific significance, and some with a unique name. Let’s go over some of them.
The marabozu candle is one that solely consists of a body. There’s no or almost no wick at all. This means that either the bulls or the bears controlled the action from the start of the trading period to the close. The marabozu is the strongest single candle indicator.
Long wick candles
Candles with long wicks indicate that either the bulls or the bears were succesful in pushing the price a long way in their favor, the other side found strength in the end and the price went back near the outset again. You often see long wicks at reversal points when bulls are buying the dip or bears are taking profit.
Candles with a small body and more or less equal wicks on each side are called spinning tops. These indicate that there has been fighting between the bulls and bears, and each side was succesful in pushing the price in their favor. But in the end, none of them had a big upper hand, and the price closed near the opening level.
The doji candle is a candle that has almost no body, meaning that while there was fighting between the bulls and bears, neither side was able to having moved the price at the end of the trading period. Most of all, a doji signifies indecision in the market. But standing next to other candle types, it can provide a strong signal.
Gravestone and Dragonfly Doji
These colorfully named candles are subtypes of the doji. The gravestone doji has a long upper wick, indicating that bulls were pushing the price up during the trading period, but in the end the bears woke up and pushed the price all the way down again. The dragonfly doji is just the reverse scenario. These doji types are very significant when part of a pattern together with other candles. We’ll revisit that in a later article.
Even though a single candlestick with significant volume can give you important knowledge about the market, the true strength of candlesticks lie in the pattern they create standing next to each other. In the next article we’ll dive deeper into this.
For now, please save or bookmark this cheat sheet to always have in handy when practising on your candlestick charts: