Candlestick charts are the paramount choice for active traders. Most candlestick charts are based on a daily time frame, meaning that each candlestick represents one day of trading activity. See the below chart.
Each ‘candle’ on the chart represents one day of trading activity. Each candle has four data points:
- Open: the first price the stock traded at when the market opened.
- High: the highest price the stock traded at during the trading day.
- Low: The lowest price the stock traded at during the trading day.
- Close: the last price the stock traded at during the trading day.
Note: the open, high, low, and close depend on the chart time frame. For example, a five-minute chart has a new ‘open’ or ‘high’ every five minutes, every time a new candlestick is created.
There are two different types of candlesticks:
- Bullish candlesticks: when the close price is above the open price. On most charting platforms, bullish candlesticks are green or white.
- Bearish candlesticks: when the close price is below the open price. On most charting platforms, bearish candlesticks are red or black.
Below is a helpful graph showing the differences between the two candlestick types. It’s straightforward.
The rectangular portion of a candlestick is known as the “body,” while the thin lines are known as “wicks.” Analyzing the changes between these candlestick elements serves as the backbone of many traders.
This style can be called “price action trading,” with Steve Nison and Al Brooks being famous proponents.