Candlesticks originated from Japan and were the oldest form of price analysis. The earliest use of candlesticks dates back to the 18th century by a Japanese rice merchant named Homma Munehisa. It is believed that sometime around 1980’s a trader named Steve Nison accidentally discovered candlesticks, and he actually introduced the methodology to the rest of the world
To understand candle sticks let us take an example of apple market. You have a stop watch, and your assignment is to record all the trades which will happens in 10 mins. Trade means when apples are sold to someone. Naturally for a trade to happen, there should be a buyer and a seller among whom the trade will happen.
Doesn’t matter how many Kg’s are traded, you just need to log the price at which the trade took place. As soon as 10 mins are over, you will stop the watch and the recording. So you went to the market and started the stop watch.You see first trade happened on52nd second at Rs 100. Then at 1 min 45th second another trade happened at Rs. 103. Similarly you logged the details for entire 10 mins. Once the time is out, you stop the observation and come out form market.
Now there are 4 crucial data points which you will share with others.
- Price at which the first trade happened – Open Price
- Price at which the last trade happened – Close Price
- Highest traded price during the entire 10 min time frame – High Price
- Lowest traded price during the entire 10 min time frame – Low Price
If the last traded price is higher than the first traded price then this positive difference is shown by a solid green rectangle which forms the body of the candle. During the time frame the highest price at which the trade happened is shown by a line, this line is also termed as shadow or a wick. Similarly the lowest traded price is shown by a line which is also termed as shadow or wick.
Going with the same logic, during this ten minute tenure, the traded price can be reflected by series of candle sticks. Eventually after 10 mins only one candle shall be formed as seen above.
Usually intraday traders observe 15 min candle chart, whereas mid term investors use day candle chart. Long term investors usually observe weekly candle chart.