Beginner’s Guide to Candlestick Charts: How and Why?

If you’ve ever searched “Stock Market” on Google or if you’ve ever seen someone watching the share prices on a laptop you must’ve seen those fancy charts consisting of Red and Green candles, it’s the Candlestick chart. In this blog, I’ll be covering why we use Candlesticks and how to interpret those candles. Keep Reading 😁

History: The use of Candles to represent price movements was started in Japan years ago. Candlesticks were first used to represent the price of rice in the market, then when traders found this very convenient way of representing price of goods they started implementing the same in almost all trades and eventually in the stock market.

Why Candlesticks? To understand why we use Candlesticks you must know how the stock market actually works. So, a person holding a particular share let’s say x places an order to sell it for a price of let’s say “y” and at the same time there’s another person who places an order for the same “x” share for exact same price “y” then it’s a match and the shares are transferred from one Demat account to another, all this happens in seconds. So in a busy exchange such as NSE/BSE millions of such transactions take place every day and it’s impossible to keep track of the price of a share because it keeps on changing after every transaction.

To overcome this problem we use Candlesticks. So basically, there are 3 parts to a candlestick: 1) Real Body 2) Upper Shadow 3) Lower Shadow (note: a shadow is also called a wick, both are same here).

As you can see, A candlestick represents 4 things: 1) Open 2) High 3) Low and 4) Close (These 4 are also called OHLC). We’ll see all these in detail.

Before starting you should know what is Timeframe: When you’re watching candlesticks on a software/website you have the freedom to change the timeframe from 1 minute to 5 Years depending on the software.

For better illustration, we’ll take the example of Reliance Company and time frame of 1 day (9:15 AM to 3:30 PM).

1. Open: Open or better called Open Price is the price at which trading starts in a given timeframe. Suppose shares of Reliance started trading at Rs.1985 at 9:15 AM (start of the trading session) then the Open for the candlestick will be 1985.
2. High: It is the topmost point of a candlestick. Suppose throughout the day, the maximum price for Reliance Share went to Rs. 2022 (this means that a transaction took place at Rs. 2022 when both seller and buyer placed an order for the same amount) then the High or High Price of the Candlestick will be 2022.
3. Low: It is the lowest point of a Candlestick. Similar to High Price, suppose the lowest price at which Reliance Share was traded is Rs.1976 then the Low will be 1976.
4. Close: This is the price at which the last transaction took place during our timeframe i.e at 3:30 PM, suppose the last trading was at Rs.1999 then the Close of Candlestick will be 1999.

I guess by now everything about a candlestick is clear and you can make your own candlestick from the data in this example. Let’s now look at 2 types of candlesticks:

1. Bullish Candlestick: If the Close is higher than Open then it is called a Bullish Candlestick. It is generally represented in Green Color (it can be changed based on software). It shows that price of shares is increased.
2. Bearish Candlestick: If the Close is lower than the Open then it is called a Bearish Candlestick. It is generally represented in Red Color. It shows that price of shares is decreased.

Now explaining the 3 parts of Candlestick:

Real Body: The real body is the difference between Open and Close. The size of the body will vary with the difference between open and close price.

Lower and Upper Shadow: If it’s a Bullish Candle then the difference between Close and High is Upper Shadow while the difference between Open and Low is Lower Shadow and vice-versa in the case of a Bearish Candle.

So, these are the basics of Candlestick Charts I hope you’ll be able to read them now. Candlesticks form the base for technical analysis and trading patterns which I’ll cover in coming blogs. Candlestick patterns help in predicting the price of a share and it’s really an interesting topic.

Till then keep exploring and Keep Investing 👍