Japanese Candlesticks represent a way of drawing a price chart where each trading period is characterized by
- An open price;
- A closing price;
- A high;
- A low.
Together, these four elements form a shape resembling a candle (hence, the name “candlesticks").
The setting of your chart determines what period each candle represents. The duration can be as short as one minute and as long as one month.
The price range between the open and the close forms the body of a candle. The period's high and low prices form the tails, also called the whisks or the shadows.
A bullish candle is the one where the closing price is higher than the open. In charts, this candle is shown as green.
A bearish candle is the one where the open price is higher than the closing price. In charts, this candle is red.
The body of a candle can be long or short. A long bullish candle signifies more buying pressure for the period compared to selling pressure. On the other hand, a long bearish candle signifies more selling pressure compared to the buying pressure. A short body candle depicts indecisiveness between the buyers and the sellers.
The length of a candle’s tails can also demonstrate the bearish or the bullish momentum during the period of the candle’s formation. There could be long tails, medium tails or no tails at all on both or either sides of a candle.
A big portion of Technical Analysis is dedicated to determining the price action from how candles look, individually, and more importantly, in combinations. There is a number of candlestick patterns (single candlesticks, dual, and triple) that can signal a possible trend reversal or, just the opposite, continuation of a trend.
Individual candlesticks and candlesticks patterns by themselves, however, should not be the only determining factor in making trades because the reliability of their signals varies. Other factors, like volume, analytics indicators, market sentiment, and news should be taken into account too.