LESSON 1 : UNDERSTANDING CANDLESTICKS
What are Japanese Candlesticks?
Japanese candlesticks are chart units that display price action for a given period.
Each
candlestick represents a specific timeframe and gives data about the price’s
open, high, low and close during the period.
Each
candlestick represents a specific timeframe. It gives information about the
asset’s opening, high, low and closing price during the period. Standard
candlesticks consist of a candle body plus an upper and lower wick.
The
candle body extends from the closing price to the opening price of an asset for
a particular period. The tip of the upper wick of the candle shows the highest
price attained during the period. The candle’s lower wick starts at the lowest
price seen during the period and rises up to the body of the candle.
Bullish vs. Bearish Candles
Candles
are bullish or bearish depending on the direction of the price during the
period they are drawn for.
Bullish
Candlestick
A
bullish candlestick forms when the price opens at a certain level and closes at
a higher price. This type of candlestick represents a price increase over the
period in question. The default color of a bullish Japanese candlestick is
green, although white is also often used.
Bearish
Candlestick
A
bearish candlestick forms when the price opens at a certain level and closes at
a lower price. This candlestick shows a price drop. The default color of the
bearish Japanese candle is red, but black is also popular.
As an asset’s price is plotted over time using Japanese candlesticks, they form a Japanese candlestick chart of many candlesticks. The graph you see below is a 4-hour candlestick chart where each of the candlesticks represents a 4-hour period.
You can use many different chart timeframes or periods to plot candlestick charts in your technical analysis system or trading platform. The most common are:
- 1-minute
(M1)
- 5-minute
(M5)
- 15-minute
(M15)
- 30-minute
(M30)
- 1-hour
(H1)
- 4-hour
(H4)
- Daily
(D1)
- Weekly
(W1)
- Monthly
(M1)
The
smaller the timeframe you use, the closer you look into the price action of the
asset. It’s like you are zooming into the chart. Let’s say you are looking at
an H4 chart like the one shown above. When you switch to the H1 chart, you will
have 4 times more candles. Each H4 candle period expands into 4 H1 candles.
Now,
let’s get back to the H4 chart. Let’s say you switch to a daily or D1 chart,
where each candle represents 24 hours. Every 6 H4 candles get grouped into a
single D1 candle. You will feel like you are zooming out of the price action as
you increase the time period of your candlestick chart.
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