What are Candlesticks used for – Everything You Need to Know

November 16, 2022

What are Candlesticks On a Chart Used For: Everything You Need to Know

Candlestick charts are used to determine price movements based on previous trading patterns. They differ from traditional bar charts. Many traders prefer using candlestick charts since they offer a far more pleasant visual price perception. If you would like to start using candlestick charts, this blog is for you. You’ll learn the essential components of a candle, the history of candlestick charts, and why they’ve become a go-to trading tool for many modern traders.

What Is a Candlestick on a Chart?

A candlestick is a technical tool that packs multiple time frame data into single price bars. This makes candlesticks far more valuable than simple lines connecting the dots of closing prices or the traditional open, high, low, and close bars. When completed, the candlestick patterns help predict the price direction. Traditionally, traders used candlesticks to capture a day’s data, price action, and trending news, making them vital for longer-term and swing traders.

Each candle tells a story, which can be interpreted as a contest between buyers and sellers, and come in different color codes. The default displays are green or white colors (light candles) which traders can interpret to mean that buyers carried the day. If the color is red or black, it’s a clear indication that sellers dominated that day. But that’s not what makes candlestick patterns so interesting. The battle between the buyers and seller and what happens between the open and the close do.


So, what are the benefits of using candlesticks in trade? They give cryptocurrency trades more clarity regarding the moves expected to come next. Typically, unlike traditional bars, candlesticks help traders decide when to exit the market or when to open short and long positions preventing catastrophic losses due to unforeseen outcomes. Candlesticks will help you determine trends, realize current market sentiment in real time, and understand momentum.

A Brief History of Candlestick Charts

The use of candlestick charts can be traced back to 1700s Japan when a rice trader, Homma Munehisa, developed the concept. Homma discovered a strong link between the rice price and supply and demand. He concluded that the markets were influenced mainly by the emotions of the traders. He used what would become modern-day candlestick charts to depict those emotions visually by using different colors to represent the size of price moves. In the 1700s, candlestick charts gave Homma and other traders an overview of the open, high, low, and close market prices over a specific period.

Homma’s charting style became very popular since it made it easy to read and understand the graphs. The traders also realized that the charts would effectively predict future demand in the long term. It was, however, not until the mid-1700s that the concept became more precise when Homma’s youngest son inherited the family business. The family would move the trading company from Sakata to Edo, Tokyo.

Homma’s research established more concrete interpretations of what would become known as Candlesticks. His research findings, which he had dubbed the “Sakata Rules,” became an essential framework for Japan’s investment philosophy. Charles Dow would later pick up his method of predicting markets in 1900. Since then, candlestick charts have become a go-to analytical tool for traders of financial instruments. Today, traders use candlesticks to make trading decisions based on occurring price patterns that help predict the short-term price direction.

Candlestick vs. Bar Charts

Ideally, candlestick charts and bar charts indicate the same information, just in a different way. Candlestick charts are, however, more visual due to the use of color coding to represent the price bars. They also have thicker real bodies than bar charts, which is way better when indicating the difference between the open and close prices.

Above and below the real bodies are wicks or shadows, indicating the day’s trading’s high and low prices. If the upper wick is short, it shows that the day’s open price was near the high of the day. If the upper shadow is short on an up day, the close price is near the high of the day’s trading.

This relationship between the day’s open, close, high, and low determines the appearance of the candlestick. Real candle bodies can be long, short, black, or white. Shadows, on the other hand, can be short or long. Knowing how to interpret candlesticks will go a long way in helping you predict price movements.



How Traders Interpret a Candle on A Candlestick Chart

To start using candlestick patterns when trading, you must first understand how to interpret candles in a chart. Typically, three points are used in creating a price candle – open, close, and wicks. In between, you have high, low, direction and range. Here is what the different points mean when it comes to trading:

  • Open price: It depicts the first price traded when a new candle is formed. When the price starts trending upward, the candle turns green or blue, and red if the price declines.


  • Close price: This is the last price traded during the candle formation period. If the close price fall below the open price, the candle will turn red and green or blue if the close price rises above the open price.


  • The wick: Also referred to as “shadow,” they are points on the candle that indicate the price extremes for a certain charting period. Wicks appear thinner than the candlestick body.


  • High price: The top of the upper shadow usually indicates the highest price traded during a specific period. If the candle doesn’t have an upper wick, it indicates that the open or close price was the highest price traded.


  • Low price: This is the bottom of the lower wick indicating the lowest price traded. If a lower wick is absent, the lowest price traded is the same as the open or close price.


  • Direction: This is the price direction usually indicated by the color of the candlestick. If the price is closing above the opening price, the price is moving upwards, and the candle will appear green, although the specific color will depend on the chart settings. The candle will be red if the price closes below the open price.


  • Range: This is the visual difference between a candle’s lowest and highest price, calculated by subtracting the top of the upper wick price from the price at the bottom of the lower wick. Ideally, range equals highest point minus lowest point, simple!



What Are the Different Candlestick Patterns?

The up and down price movements usually create candlesticks. These price movements, while sometimes appearing random, form patterns traders use for trading and analysis purposes. Candlestick patterns fall into two categories – bullish and bearish. Bearish patterns indicate a likely price fall, while bullish indicate the opposite. No one pattern works all the time. Ideally, these patterns represent tendencies in price movements rather than guarantees.

Here are the different candlestick patterns:

Bearish Engulfing Pattern

This pattern develops in an uptrend when sellers are more than buyers. It’s usually represented by a long red real body that engulfs a real green body. The pattern usually indicates the price will continue declining since sellers are back in control.


Bullish Engulfing Pattern

This pattern occurs when buyers outnumber sellers. It is represented by a long green real body that engulfs a small red real body. Since buyers have established control, the price is likely to go higher.


Bearish Evening Star

An evening star is a topping pattern identified when the last candle in the pattern opens below the previous day’s small real body (red or green). The last candle usually closes deep into the red or green real body two days before. The pattern is interpreted as a buyer stall before sellers take control, indicating that more selling could develop.


Bearish Harami

This is a small red real body that appears completely inside a previous day’s real body. For traders, it’s not a pattern to act on, but it’s worth watching since it shows indecision on the part of the buyers. If the price keeps climbing, it’s a good thing, but if a down candle follows this pattern, it indicates a further slide.


Bullish Harami

When the Bullish Harami appears, a small green real body appears inside a previous day’s large red real body. It indicates that a downplay is in play, which means that the trend is pausing. If followed by another up day, it indicates that more upside might be forthcoming.


Bearish Harami Cross

This pattern occurs in an uptrend, whereby a Doji follows an up candle. A Doji refers to a session when a candlestick has an equal open and close price. The Doji occurs within the real body of the previous session with the same implications as a bearish harami.


Bullish Harami Cross

This one occurs in a downtrend. A down candle, in that case, is followed by a Doji, occurring within the real body of the previous session. It has similar implications as the bullish harami.


Bullish Rising Three

The pattern is observed for a few sessions and starts with what traders refer to as a “long white day.” On the second, third, and fourth trading days, small real bodies lower the trading price but stay within the same price range as the long white day pattern. The pattern is yet another long white day on the fifth and last day.

While the pattern may show a price fall for three straight days, no new low can be seen, and it is during that time that bull traders prepare to make the next move, which is usually up. A slight variation may occur in the pattern when the second-day gap goes up slightly after a first long up day. However, everything else is the same; it only looks different. When such a variation occurs, it’s referred to as a bullish mat hold.


Bearish Falling Three

This pattern starts with a strong down day followed by three small real bodies making upward progress and then staying within the range of the first down day. The pattern is complete when another significant downward move occurs on the fifth day. That indicates that the price could go lower since sellers are back in control.



Traders have relied on candlestick patterns for centuries to predict price direction. Many of the existing candlestick patterns work for the same reason as other technical analysis tools; traders follow them. Candlesticks are usually based on current and past price movements and are not usually taken as future price indicators. You can combine them with other forms of technical analysis, like momentum indicators. However, candles are their own stand-alone forms of charting analysis, unique and a favorite of traders who know how to interpret them.


Thanks for Reading!


Disclaimer : This is not trading or investment advice. The above article is for educational purposes only. Please do your own research before purchasing or investing in any cryptocurrency.

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