The secrets of candlesticks
Candlestick analysis allows you to visualise price trends and gain insight into the behaviour of financial markets in order to build effective trading strategies.
One of the methods traders most commonly use to show prices and study financial market movements is called candlestick analysis, an analysis based on information provided by Japanese candlestick charts.
In daily charts, candlesticks are constructed using the four most important prices recorded each day for the financial asset:
- the opening price (Open),
- the highest price (High),
- the lowest price (Low),
- the closing price (Close).
Each candlestick is formed by:
- a real body, which reflects the range between the opening price and the closing price. The body of the candle can be black (or dark in colour) or white (or light in colour).
A black body indicates that the closing price is lower than the opening price, and a white body indicates that the closing price for the day is higher than the opening price.
- two shadows (sometimes called wicks), i.e. two lines that show the high and low price traded for the chosen period. The vertical line above the body represents the high and is called the upper shadow, while the vertical line below the body represents the low and is called the lower shadow.
Commonly, traders also use red and green colours for the real body.
The first fundamental distinction is between:
- white (or green) candles, where the closing price is higher than the opening price, illustrating an uptrend;
- black (or red) candles, where the closing price is lower than the opening price, illustrating a downtrend.
The next features to look at are:
- the length of the real body,
- the length of the real body in relation to the length of the shadow,
- the positioning of the real body within the daily range.
This information provides valuable inputs about financial market patterns. We can see if the trading session was a consolidation day or a trend day.
Consolidation days mean prices oscillate in a sideways movement within a trading range, without any notable breakouts.
On these days, upward pressure and downward pressure are equal, and volumes are generally low. Meanwhile, trend days are directional trading sessions in which one market force clearly prevails over the other. If buyers dominate, prices shoot upwards, supported by a sharp increase in trading volumes. This forms a candle with a long white body. Conversely, if sellers dominate, prices fall drastically, creating a candle with a long black body.
By analysing a single candlestick or a set of two or three consecutive candlesticks, traders can better understand what is happening on the market.
In some cases, they can spot signals to confirm the strength of developing trends, or in others pick up on signals pointing to trend reversals (i.e. when an uptrend or downtrend stops and changes direction).
The most widely known patterns include the Hammer, Shooting Star, Bullish/Bearish Engulfing, Harami, and the Dark Cloud Cover.
Some trading platforms have designed systems that automatically detect candlesticks patterns. For example, the Advanced Trader platform developed by the online broker Swissquote offers a useful «pattern recognition» feature.
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