Japanese candlesticks can be used to create trading strategies themselves or to just help you understand the direction and activity on the chart. We examine below, the structure of a candle stick and what it means, the different types of candle sticks you might see on a stock trading chart, and how you can use the candlesticks as indicators of market sentiment.
Japanese Candlesticks and timeframes
A new candle is formed on the chart every ‘n’ minutes/hours/days/etc, depending on what chart timeframe the chart is set to. For example, in the chart below, the timeframe setting is ‘D’ for ‘one day’ – so each day another candle completes its formation. As you can see below, there are many timeframe settings. Switching between them will change the candles so that a candle appears at each interval selected.
Structure of Japanese Candle Sticks
An example of a Japanese candlestick is shown above.
The most obvious thing to say about these is that they look like candles – but each part tells you something about what is happening to the price, as follows:
- – Upper wick – this element shows you the highest price level which the instrument reached within the timeframe applicable to the candles.
- – Lower wick – conversely, the lower wick shows you the lowest price reached within the time interval.
- – Candle body – the top part of the candle will show you either the closing price, or the opening price, depending on whether the candle is red, or green (sometimes substituted for blue). Broadly, if your trade is predicting the price to rise, green or blue candles are good news, red ones are bad, and vice versa. You can see on the chart above that when the price is rising, the candles are mostly green.
The purpose of using candle sticks is to provide a quick and visual indication of what is happening to the price.
There are a few special types of candles which are easy to spot and which have extra meaning. These are discussed on our Japanese Candlestick Patterns pages linked below:
Shooting star/Hanged man:
Tweezer tops and bottoms:
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