What is candlestick chart?

To trade or to invest, we all need to study the technicals, which are in the form of charts. This study of charts is known as technical analysis. And the most commonly used chart by most traders and investors is the candlestick chart. The candlestick chart was first developed in the 18th century by a Japanese rice trader named Homma Munehisa. He is also called the father of candlestick chart patterns. Later in 1991, this chart was introduced to the world by Steve Nilson through his book called, Japanese Candlestick Charting Techniques.

"Candlestick chart." The name itself tells us that it is a chart that involves candles. Each candlestick tells us the sentiment of the market, if it is a bullish or bearish sentiment. And a group of candlesticks forms a pattern which then indicates the market trend or gives an idea of where the market can move next. Each candle has an important role in the chart and represents the price movement that occurred during a defined time period.

Let's understand what a candlestick is made up of:

In the above bullish candlestick, the candle started forming from the opening price, made a low, and further went up, making a high, and the candle completed at the closing price. The space between the opening price and the closing price is known as the body of the candle. As the candle makes a low and a high, because of which you can see shadows formed, which are also called as wicks of the candle.

Now in the above bearish candlestick, everything is similar to the bullish candlestick except the opening and the closing price. The candle started forming at the opening price and further came down and closed at the closing price.

Now from the above candlesticks, you come to know how to read a candlestick structure, but not necessarily all the candlestick shapes will be in this form only. There are many types of candlesticks, such as Marubozu candles, hammer candles, inverted hammer candles, dogi candles, etc., which have their own significance.

On the chart you will get the time period to choose for the candlesticks with a time range of 1 minute to 1 month or a year. For example, a 5-minute candlestick will represent the price movement that happened in five minutes, and in the same way, a 1-hour candlestick will represent the price movement that happened in one hour. Lesser time-frames(1 minute to 1 hour) are best for traders as they have to buy and sell trades on the same day itself. Larger time frames (1 day to 1 month or 1 year) are better for investors because they provide a broader view of the market and help you identify the short-term or long-term trend. By studying the past candlestick chart, you can predict the future movement of the market and take trades accordingly.

Why use the candlestick chart over other charts?

1. Easy to understand:

A line chart or a graph chart won't tell you what exactly happened in 15 minutes, a day, or a month because they just flow continuously with the data and don't provide a clear picture. whereas each and every candle on a candlestick chart gives you clear data about the sentiment of the market in every timeframe, which makes it easy for us to trade with confidence.

2. Recognizing trends:

The candlestick chart makes it easy to identify trends by simply watching the past collective data of the candles and their movements in the market. You will find each candle is giving you a signal about the possible trend, which we can't get in other types of charts.

3. The formation of patterns:

A group of candlesticks forms a pattern which indicates that a strong move is about to come in the market.

Traders usually take trades based on different candlestick patterns to achieve high accuracy and to get the most profit out of the market.

4. Buyer and seller sentiment:

As we discussed earlier, each candle shows us the sentiment of buyers and sellers. If we observe a line chart or any other type of chart, you won't be able to identify the sentiment easily and will struggle to take trades which can go wrong. Sentiments are very important as they help us to show the direction of the market.

5. High accuracy:

All four of the above reasons make the candlestick chart the most suitable chart to use when it comes to trading in the stock market. It gives us the optimum accuracy and thus helps us to take high-accuracy trades, which increases our winning percentage in the market.

The most important part of technical analysis is to study a chart, and once you learn how to do it, your trading becomes easy. Chart reading is a skill and it takes time to be good at it, so be patient and just focus on learning and you will achieve success for sure. I hope this blog helps you simplify what a candlestick chart is and makes your stock market journey easy.

If you have any doubts, please write them down in the comment box below and I will surely answer them all.

Thank you!

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