What is Candlesticks in Trading?
Candlesticks, also referred to as Japanese candlesticks or the K-line, represent the price movement of a security, derivative, or currency. In cryptocurrency, traders rely on candlesticks to make informed decisions.
A cluster of candlesticks makes up a chart that depicts the pictorial representations of the price movement of a crypto asset. It gives the crypto trader a lot of information about the price history of a crypto asset per time.
It shows the price movement history for years, months, weeks, days, hours, and even minutes. The crypto trader relies on data gathered from the movement of the candlestick to make informed decisions about the best time to take a position or exit the market.
What are the Components of a Candlestick?
There are 3 major parts of the candlestick.
These are the upper shadow which looks like a candle wick, the real body of the candle, and the lower shadow, which is the lower candle wick. The distance between the upper wick and the candlestick’s body signifies the open and high components. In contrast, the distance of the real body signifies the opening and closing price of the candlestick. The final component is the distance between the real body and the lower shadow. It is referred to as the close and low.
Although any color of choice may represent a candlestick, two typical colors represent them by default. These are green and red colors. These colors symbolize the direction of each candlestick. The green candlestick depicts an upward trend which means that the number of people that bought the crypto asset supersedes the number of people who sold it. Therefore, the price of the crypto asset goes up in value.
The red candlestick depicts a downward movement of the crypto asset meaning more people sold than bought. Thus, the price of the cryptocurrency goes down in value. Each candlestick on a chart has a time frame. These time frames could be minutes, hours, days, months, or even years. The choice of time frame depends on the individual trader. Most traders utilize multiple timeframes during analysis.
A Brief History of the Candlestick
It will interest you to know that candlestick usage dates back to the 18th century. It was the invention of a Japanese rice trader known as Munehisa Homma. The idea was introduced into the western world through a book titled Japanese Candlestick Charting Techniques, first published in 1991.
How Candlesticks are used
Candlestick charts are a visual aid for traders to make decisions about a stock, a commodity, a foreign exchange, options, or a crypto asset. By looking at a candlestick, the trader can tell the cryptocurrency’s opening and closing prices, the highs and lows, and the overall time range of each candle.
Candlesticks are the cornerstone of technical analysis. For instance, many traders open buy positions when a bullish candlestick (green) engulfs a bearish candle (usually red) at a crucial demand zone. On the other hand, when the bearish candle engulfs a bullish or green candle at a crucial supply zone, traders tend to open sell positions.
In summary, candlestick patterns refer to a particular sequence on a candlestick chart that serves the purpose of identifying trends. When mastered, candlestick patterns can be used to project the direction of the price at a given time.