What is a candlestick?

A candlestick isn’t just something you place in the middle of a table for a romantic meal; it’s also something you’ll find on trading charts when looking at the value of a security or cryptocurrency asset. Candlestick charts have been used for over 300 years, and they’re an incredibly important and common tool traders use to track their investments.

With that being the case, it’s important to understand what candlestick charts are and how to read them before making cryptocurrency investments of your own. In this AAG Academy guide, we’ll teach you everything you need to know about candlesticks in cryptocurrency.

What is a ‘candlestick’ in cryptocurrency?

A candlestick is an identifier found on a candlestick chart. It is used to represent the movement of an asset’s value over a short period of time. Depending on how the chart is viewed, each candlestick might represent a day, an hour, or just a few minutes, and it helps traders analyze how an asset’s price has fluctuated at a glance.

Candlestick charts are believed to have originated in Japan in the eighteenth century when Munehisa Homma, a rice merchant, developed a new way to represent the changing market price of rice. Similar charts were later adopted by other traders to analyze the value of other assets, and in the early ‘90s, candlestick charts made their way to the West.

Today, these charts are heavily used by traders and financial analysts to monitor market activity. If you want to track the price of a certain cryptocurrency, you will almost certainly need an understanding of how candlestick charts work.

How does the candlestick work?

Candlesticks show us a surprising amount of information about pricing despite their diminutive size. A single candlestick shows changes in price over a period of time, as well as the potential price in the future. When multiple candlesticks are combined in a chart, they can help inform trading decisions — and whether an asset should be bought, held, or sold.

Each candlestick represents a period of time, depending on how the chart is viewed. For instance, you might want each candlestick to show price changes for one day, one hour, or just ten minutes. The longer the time period, the easier it is to see how the value of an asset has fluctuated historically. Shorter time periods help paint a more recent picture of the market.

Candlesticks are usually displayed in green and red or black and white. Green and white candlesticks signify bullish moves or increases in an asset’s value, while red and black candlesticks signify bearish moves or decreases in an asset’s value.

What is the anatomy of the candlestick?

Before you can understand a candlestick chart, you need to know the anatomy of a candlestick itself. Each one consists of several important parts that all tell their own story. For instance, the body of the candlestick shows the open and closing price of an asset during the specified time period, while the “wicks” at the top and bottom of the body show the high and low prices during the same timeframe.

The diagram below gives us a better look at these things:

The open (O), close (C), high (H), and low (L) prices of an asset determine what a candlestick will look like.

Body: The distance from the open price to the close price.

Wick: The distance between the body and the high price or the body and the low price.

Range: The distance between the high price and the low price.

When multiple candlesticks are combined together on a chart, we can see bullish, bearish, or sideways patterns in price. Bullish patterns indicate an increase over time, while bearish patterns indicate a decrease over time. A sideways pattern indicates the price has been steady. These trends can help a trader understand how an asset’s value is moving, how it could move in the future, and what decisions should be made based on that.

For instance, a bullish pattern suggests it may be a good time to buy a particular asset, while a bearish pattern suggests it may be a good time to sell or hold. A sideways pattern usually suggests it’s a good time to hold your position, though earlier patterns — and whether they’ve been bullish or bearish — could make a difference. Of course, if you already hold a particular asset, the price you originally paid for it also plays a big part in decision-making.

Bullish trend

A bullish trend happens when the market price goes up. The lowest price point is increasing and creating a new “low” higher than the previous one, the the “high” price is increasing to create a new high. Traders typically take the buying position when there is a price correction and close their position when the price is at a new “higher high.”

Bearish trend

A bearish trend happens when the market price is decreasing. The lowest price keeps falling, creating a new “low” point. The high point also falls, creating a new “lower high” point. When this happens, traders usually sell their assets when the price is corrected and close their position when the price reaches a new low level.

Sideways trend

A sideways trend means the market condition is flat and primarily full of doubt. This typically happens when the demand and supply factors are the same. In this trend, traders usually take the selling position when the price reaches the upper limit and take the buy position when the price reaches the lower limit.

Why are crypto candlesticks useful?

As we’ve already established, candlestick charts are incredibly helpful when it comes to analyzing the state of a particular asset over time — and that includes cryptocurrency tokens. You can use candlestick charts to track the value of a particular token, and to determine whether or not it’s a good time to buy, hold, or sell.

References

• A Beginner’s Guide to Candlestick Charts
• How Does Candlestick Work in Trading?
• Understanding Basic Candlestick Charts
• Introduction to Crypto Fundamental Analysis