Definition
A candlestick chart is a financial chart used to represent the price movements of securities such as stocks, currencies, and commodities over time. Each “candlestick” visually displays four key data points for a given period: Open, High, Low, and Close (OHLC).
- The body of the candle shows the range between open and close.
- The wicks (or shadows) show the high and low prices.
- If the closing price is higher than the opening price, the candle is often colored green or white (bullish).
- If the closing price is lower, it is typically red or black (bearish).
Candlestick charts help traders identify market sentiment, trend reversals, and price patterns like Doji, Hammer, or Engulfing patterns.
Case Study
An example can be seen in the daily price movement of Reliance Industries’ stock on the National Stock Exchange (NSE). Each candlestick on the chart represents one trading day and shows four key prices — the opening, closing, highest, and lowest prices of the stock for that day. For instance, if Reliance opened at ₹2,400, went up to ₹2,450, dropped to ₹2,380, and finally closed at ₹2,440, the candlestick would have a rectangular body between ₹2,400 and ₹2,440 with wicks extending to ₹2,380 and ₹2,450. A green candle would indicate that the closing price was higher than the opening, showing bullish sentiment, while a red candle would signal a fall in price.
Historical Reference
Candlestick charts originated in 18th-century Japan, developed by Munehisa Homma, a rice trader from Osaka. He used these charts to analyze daily rice market prices and investor emotions. The technique was later formalized and introduced to Western financial markets by Steve Nison in his 1991 book Japanese Candlestick Charting Techniques. Since then, candlestick patterns have become a cornerstone of modern technical analysis.