Anatomy of a Candlestick

In this article will go through the anatomy of a candlestick from a candlestick chart and how it gives us more info than a line chart.

History of the Japanese Candlestick

Before we jump in, it is worth spending time to understand in brief the history of the Japanese Candlesticks. As the name suggests, the candlesticks originated from Japan. The earliest use of candlesticks dates back to the 18th century by a Japanese rice merchant named Homma Munehisa.

Though the candlesticks have been in existence for a long time in Japan, and are probably the oldest form of price analysis, the western world traders were clueless about it. It is believed that sometime around 1980’s a trader named Steve Nison accidentally discovered candlesticks, and he introduced the methodology to the rest of the world. He authored the first-ever book on candlesticks titled “Japanese Candlestick Charting Techniques” which is still a favorite amongst many traders.

Most of the candlesticks pattern still retains the Japanese names; thus giving an oriental feel to technical analysis.

Candlestick Anatomy

While in a bar chart the open and the close prices are shown by a tick on the left and the right sides of the bar respectively, however in a candlestick the open and close prices are displayed by a rectangular body.

In a candlestick chart, candles can be classified as a bullish or bearish candle usually represented by blue/green/white and red/black candles. Needless to say, the colors can be customized to any color of your choice; the technical analysis software allows you to do this. This website has opted for the Green and Red combination to represent bullish and bearish candles, respectively.

Let us look at the bullish candle. The candlestick, like a bar chart, is made of 3 components.

1. The Central real body – The real body, rectangular connects the opening and closing price. The opening is at the bottom end, and the closing is at the rectangle’s top end.
2. Upper shadow – Connects the high point to the close.
3. Lower Shadow – Connects the low point to the open.

The below image shows the above 3 components of bullish candle to the left.

Likewise, the bearish candle shown above to the left also has 3 components:

1. The Central real body – The real body, rectangular which connects the opening and closing price. However, the opening is at the top end, and the closing is at the rectangle’s bottom end.
2. Upper shadow – Connects the high point to the open.
3. Lower Shadow – Connects the Low point to the close.

This is best understood with an example. Let us assume the prices as follows.

The candles will print on the chart as shown in the figure below.

Here is a little exercise to help you understand the candlestick pattern better. Try and plot the candlesticks for the given data.

Once you internalize the way candlesticks are plotted, reading the candlesticks to identify patterns becomes a lot easier.

This is how the candlestick chart looks like if you were to plot them on a time series (the above image). The green candle indicates bullishness and red indicates bearishness.

Also note, a long-bodied candle depicts strong buying or selling activity. A short-bodied candle depicts less trading activity and hence less price movement.

To sum up, candlesticks are easier to interpret in comparison to the bar chart. Candlesticks help you quickly visualize the relationship between the open and close and the high and low price points.