The gain and loss in cryptocurrency or any traditional trading is subject to the movement of the asset price. In a market as volatile as cryptocurrency trading, it’s important to keep a watch on the market volatility if you want to make a profit out of it and mitigate the risk factor. Candlestick charts are nothing but a pictorial representation of the volatility.
The candle-shaped design of the graphics earned the chart its name. The concept is also called as Japanese candlestick as it evolved from there in the 17th century, much before the western world came out with their bar graph, median graph, and other mathematical tools.
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The credit of developing and using the candlestick chart goes to Homma, a rice trader. The technique was improvised over time by different scholars based on the technical analysis of the trading market.
Components of the Chart
Candlestick charts guide traders to determine possible price movements based on past patterns. Before knowing how it works and how to interpret it, it’s imperative to learn its key components. A candlestick chart has four prominent junctures (see the above image). Here is a description of the points.
- Open — The first recorded trading price of the asset within that particular time frame.
- High — The highest recorded trading price of the asset within that particular time frame.
- Low — The lowest recorded trading price of the asset within that particular time frame.
- Close — The last recorded trading price of the asset within that particular time frame.
Based on the four points, a candlestick dataset is also called the OHLC values.
The positioning of the four points defines the shape of the candlestick. The distance between the high and low is referred to as the range of the candlestick. It’s an indicator of the asset’s high and low price over the day. Likewise, the distance between the open and close price is the body of the candlestick. The Open Price marks the asset’s price at the opening and the Close Price at the closing of the day. This market sentiment and the possible outcomes based on past data helps traders to speculate logically and invest wisely.
Correlating the Chart with the Financial Outcomes
Larger body size: It shows a high interest of traders in buying and selling of assets. A high interest or demand signals an increased demand of the asset, and hence, a price rise. A shorter body size tells just the opposite. If you are planning to buy assets, look for a candlestick with shorter body size.
Open price>Close price: A lower close price is a reflection of the bearish sentiment. The fear of price drops leads to a panic selling, i.e., it favors a bearish sentiment.
Open price<Close price: A higher close price wins the confidence of investors, and leads to buying of assets, i.e., the increase in asset price favors a bullish sentiment.
Short wick: It reflects a stable market sentiment or less volatility as the high or low of the asset values remain close to the open and close position.
Some trading platforms use a selection of colors to highlight different market sentiments. An empty body or body filled with green color signals a positive thing for the investors. It means the asset price closed at a higher value than what it opened at. A filled body or one filled with red color marks the reverse trend.
A word of caution
A candlestick chart provides a broad picture of the price change over time. It shows the high and low values at the opening and closing of the market. It also shows the highest and lowest deviation from the opening and closing value, but it misses to read what happened between the time frame. It doesn’t provide microanalysis of the market over smaller time frames. Neither the wick, reads the situation between the opening/closing and the high/low.
Creating a candlestick chart over smaller time frames increases its complexity and ruins the sole purpose of quick interpretation and decision-making. If you take interest in intraday trading of cryptocurrency, where there is high volatility and you need analysis over smaller time frames, candlestick charts may not be useful.
It’s important to read the underlying bearish or bullish sentiment factors before selling out or buying assets.
