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A candlestick is a simple way of displaying key information about an asset’s price movement over a set amount of time on its chart. They show four different price levels that an asset has reached in a given time period: which can be as short as a second, or as long as a month.
There are three main features of a candlestick.
The colour of a candlestick is used to denote whether the asset’s price increased or decreased in the given time period. If the candlestick is green, then the asset moved up in price. If it is red, then its price decreased.
The body is the thick main part in the middle of the candle stick. It is used to show the price of the asset at the beginning of the given time period (the opening price) and at the end (the closing price).
- If the candlestick is green, then the bottom of the body will be equal to the opening price and the top will be the closing price
- If the candlestick is red, the opposite is true and the bottom will show the closing price while the top shows the opening price
The wick, or the ‘shadow’ of the candlestick is used to show the highest and lowest price points reached by an asset in the time period. It doesn’t matter what colour the candlestick is, the top of the wick (known as the upper shadow) is the highest price, and the bottom (or lower shadow) is the lowest price.
Types of candlestick
The different shapes made by candlesticks often have individual names, and signal certain market conditions. The shooting star, for instance, is a red candlestick with a long upper shadow and no lower shadow that traders believe signals a bear market (as the closing price and lowest price are the same, and some distance from the highest price and opening price).