Candlesticks, or candlestick charts, denote types of price charts which bear information on several aspects of any security. Most of these charts are used by technical stock analysts to determine the right time to buy or sell a stock. The idea of candlesticks came into being more than 400 years ago when Japanese rice merchants used such diagrams to determine how their business was faring.

A candlestick chart of any security will contain the highest and lowest price points of a particular stock, besides its opening and closing prices. This information is collated mostly from intra-day trading.

Depending on prices and demand of a specific stock, candlestick shapes can vary widely. Market conditions, especially during bullish or bearish situations, also leave a significant impact on a candlestick’s shape. 

One great benefit of candlestick chart analysis by technical traders is the chart’s ability to help a trader determine market sentiments; this information assists them in entering and exiting a trade at an opportune moment.

What is Candlesticks?

Candlesticks are charts which show the price movement of a particular stock throughout a day’s trading. As mentioned above, it gives the opening and closing prices, plus the maximum and minimum prices a particular stock reached intra-day.

Such charts are great tools that help forecast, with a reasonable degree of confidence, the price movements of currencies, derivatives and securities. They are so named because they closely resemble Japanese candlesticks with a wide-body and wicks on both ends. 

Interpreting a Candlestick

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The following elements constitute almost all types of candlesticks currently used.

  • Open – It is the opening price of a stock when trading starts.
  • High – Candlesticks can record price differences for varying periods. In this duration, the highest price set for that stock is reflected by a chart’s ‘upper shadow’. Note that if its opening price was also its highest price during trading, the ‘upper shadow’ would be absent.
  • Low: It is the opposite of a stock’s upper price limit. The lowest price that a particular stock fetches during trading is its ‘lower shadow.’ Here too, if its opening price when trading hours start is also its lowest price point, this chart will be prepared sans a ‘lower shadow’
  • Range: Determining a stock’s range of price shifts is rather easy. Subtracting its lowest bid from its highest one during an intra-day operation will yield its range. Note that volatility of a stock is linked directly with its price range.

A candlesticks’ colour is determined by market forces. If a scrip’s closing price at the end of a trading day is above its opening price the next day, the candlestick’s central or rectangular portion will be green. Else, if the opposite effect occurs and a stock’s opening price next day is lower than its previous day’s closing, the central part will be red.

Note that intra-day trading is enormously hectic. Stocks of several large companies fluctuate multiple times within a single day, sometimes within an hour. A candlestick colour is put in only after a day’s trading ends.

Advantages of Candlesticks: Real-World Example

An experienced investor who is adept at candlestick chart analysis can gain several facets of information about a particular stock. At times, this interpretation can provide an insight into a niche’s performance.

Consider, for example, the stock fluctuations and closing prices of Maruti Suzuki India Limited (MSIL). It is listed on the NSE as MARUTI

On 14th February 2020, its shares closed at Rs. 6,852 which was an appreciation of just above Rs. 15 over its previous closing price on 13th November. Over a period of 5 days, its share prices plummeted to Rs. 6,798.30 on 10th November. 

If one looks at MSIL’s share prices on 29th May 2020, it will be obvious that the company was in a weaker financial shape; its scrip closed at just Rs. 5610.80.

Thus, over the last 6 months, MSIL has withered the current economic turmoil and revived most of its sales. From a candlestick analysis of these numbers, 2 conclusions can be reached –

  1. India’s domestic automobile demand is slowly rebounding back. Maruti Suzuki controls around 53% of India’s 4-wheeler market, making it the largest player. With its turnaround, it is reasonable to assume that other manufacturers too are gradually reaching a respectable stock price.
  2. All ancillary industries which contribute to the vast automobile sector are gradually returning to full capacity after lockdown.

An experienced trader can thus analyse details of a market or a particular sector using various types of candlesticks.

Popular Candlestick Charts

In 2008, the noted author and market expert Thomas Bulkowski completed his seminal work on chart analysis. His book- Encyclopaedia of Candlestick Charts – was published that year.

His charts also carry information on whether the market is expected to be bearish or bullish in nature.

Based on his work, the most popular candlesticks used globally are the following. Bulkowski himself provides their accuracy estimates.

Candlestick charts
Name of chart Accuracy rate
Three Line Strike 83%
Two Black Gapping 68%
Three Black Crows 78%
Evening Star 72%
Abandoned Baby 49.73%

All experienced investors use candlesticks to analyse market sentiments which gives them enough actionable information on whether to buy or sell a stock. Those planning to invest in the market using data gleaned from these charts, one must have a brokerage account.