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What are candlestick charts?

Traders prefer candlestick charts because they are visually more appealing.

, ET Bureau|
Last Updated: Jan 24, 2020, 10.26 AM IST
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If the closing price is above the opening price, it clearly shows that the bulls won the fight that day and, therefore, this is considered a bullish candle.
In an earlier issue, we introduced several charting techniques like line chart, bar chart, candlestick chart, point & figure charts, etc. Since there are several trading rules based on candlestick chart patterns, let us study them in detail now.
Bar chart vs Candlestick chart - A candlestick chart is also plotted with 4 share price data (i.e., open, high, low and close) like a bar chart.

However, traders prefer candlestick charts because they are visually more appealing. Traders can also recognise the mood of the market just by looking at the colour and length of the candle’s body and shadows.

Candle Body - In a candlestick chart, the portion between open and close is highlighted as a thick line and is commonly known as the body of the candle. This is because the relationship between the opening and closing prices explains a lot about the action during the day and is much more important than the extreme trades, which are usually captured as high or low of the day.

If the closing price is above the opening price, it clearly shows that the bulls won the fight that day and, therefore, this is considered a bullish candle. Traditionally, the body of bullish candles is marked as white; several technical charting programmes now plot them as green to make them visually more appealing. Similarly, if the price closes below the opening price, it reveals the strength of the bears. In such a case, the body of these bearish candles is either marked in black or red. The length of the body is also important. While a long green body shows strong bullishness, a long red body shows the severity of bearishness.

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Shadow - The remaining portion in a candlestick chart, i.e., the part other than the body marked in green or red, is depicted as thin lines. These are commonly known as shadows, wicks or tails. One can see these shadows as small lines extending out of the bullish or bearish candles in the chart. Though not as important as the body, the length of the shadow (or its absence) also gives a clear signal about the market mood for that day. For instance, long upper shadows are usually considered bearish because they are formed when bulls try to take the prices to much higher levels, but lose control midway and, hence, the prices close well below the high. Similarly, long lower shadows are considered bullish because the bears are not able to sustain the pressure till closing.

Japanese words - A candlestick charting technique was developed by Japanese commodity traders and they are usually called Japanese Candlesticks. Most of the terms used are also Japanese. However, we will try to use English terms wherever possible.
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