# Candlestick Chart: Definition and the Basics

> **Definition**
>
> A candlestick chart is used by financial analysts to track the price movements of a stock or other security over time.

## What Is a Candlestick Chart?

A candlestick chart is a type of financial diagram that technical analysts use to follow price trends. The candlestick shows key pieces of information: opening and closing prices and the high and low prices for a specific time frame.

The candlestick chart was developed by Japanese rice merchants centuries before it was adapted for use by stock traders in the United States.  

### Key Takeaways

*   A candlestick chart reflects changes over time in investor sentiment.
*   Technical analysts use the charts to decide when to enter and exit trades.
*   Candlestick charts are used in trading many assets such as stocks, foreign exchange pairs, and futures.

![Candlestick: A type of price chart used in technical analysis that displays the high, low, open, and closing prices of a security for a specific period.](https://www.investopedia.com/thmb/-Hm-8LMh4difcpqaP1kBTcv9WII=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-c-candlestick-25a39ce21cd84c24a71c41610c4aa497.jpg)

*Candlesticks reflect investor sentiment’s impact on security prices and are used by technical analysts to decide when to enter and exit trades. — Ryan Oakley / Investopedia*

## The Basics of a Candlestick

![Candlestick](https://www.investopedia.com/thmb/jTQXLVEbgsZXYgZ-aADye0xFZ2o=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/CandlestickDefinition3-a768ecdaadc2440db427fe8207491819.png)

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The wide part of the candlestick is called the “[real body](https://www.investopedia.com/terms/r/realbody.asp).” It tells investors whether the closing price is higher or lower than the opening price. It appears as black/red if the stock closed lower or white/green if the stock closed higher.

The candlestick’s shadows show the day’s high and low and how they compare to the open and close. Its shape varies based on the relationship between the day’s high, low, opening, and closing prices.

Candlesticks reflect the impact of investor sentiment on security prices, and they’re used by [technical analysts](https://www.investopedia.com/terms/t/technical-analyst.asp) to determine when to enter and exit trades. Candlestick charting is based on a technique developed in Japan in the 1700s for tracking the price of rice. They’re a suitable technique for trading any liquid financial asset, such as stocks, foreign exchange, and futures.

### White/Green Candlesticks

Long [white/green candlesticks](https://www.investopedia.com/terms/w/white_candlestick.asp) indicate strong buying pressure. This typically indicates that price is bullish, but they should be looked at in the context of the market structure rather than individually.

A long white candle is likely to have more significance if it forms at a major price support level.

### Black/Red Candlesticks

Long black/red candlesticks indicate significant selling pressure. They suggest that the price is bearish.

### Hammers and Hanging Men

The hammer is a common bullish candlestick reversal pattern that forms when the price moves substantially lower after the open and then rallies to close near the high. The equivalent [bearish candlestick](https://www.investopedia.com/terms/b/bearishbelthold.asp) is known as a hanging man.

These candlesticks have a similar appearance to a square lollipop and are often used by traders attempting to select a top or bottom in a market.

> **Important**
>
> Traders can use candlestick signals to analyze all periods of trading, including daily or hourly cycles or even minute-long cycles of the trading day.

## Two-Day Candlestick Trading Patterns

Many short-term trading strategies are [based on candlestick patterns](https://www.investopedia.com/terms/s/stick-sandwich.asp).

The engulfing pattern suggests a potential trend reversal. The first candlestick has a small body that is completely engulfed by the second candlestick. It’s referred to as a bullish engulfing pattern when it appears at the end of a downtrend and as a bearish engulfing pattern after an uptrend.

The harami is a reversal pattern where the second candlestick is entirely contained within the first and is [opposite in color](https://www.investopedia.com/ask/answers/07/candlestickcolor.asp). The [Harami Cross](https://www.investopedia.com/terms/h/haramicross.asp) has a second candlestick in a related pattern that’s a [doji](https://www.investopedia.com/terms/d/doji.asp). The open and close are effectively equal.

## Three-Day Candlestick Trading Patterns

An [evening star](https://www.investopedia.com/terms/e/eveningstar.asp) is a bearish reversal pattern in which the first candlestick continues the uptrend. The second candlestick gaps up and has a narrow body. The third candlestick closes below the midpoint of the first candlestick.

A [morning star](https://www.investopedia.com/terms/m/morningstar.asp) is a bullish reversal pattern where the first candlestick is long and black/red-bodied, followed by a [short candlestick](https://www.investopedia.com/terms/s/short-line-candle.asp) that has gapped lower. It’s completed by a long-bodied white/green candlestick that closes above the midpoint of the first candlestick.

## Explain a Candlestick Chart Like I’m 5 Years Old

A candlestick chart is a visual representation of how the price of an asset, such as a stock or currency, has moved over time. Each candlestick on the chart shows four pieces of information:

*   The opening price
*   The closing price
*   The highest price
*   The lowest price

The colors and shapes of the candlesticks easily signal to traders if the price went up or down and by how much. Traders like using these charts because of the ease of use and the amount of detail they convey in a small space, allowing them to look for patterns, which guide their trading decisions.

## How Will I Use This in Real Life?

If you’re a trader, specifically a technical trader, candlestick charts can help you make decisions. They clearly convey how an asset’s price has moved and how sustained that move is: whether just a spike, a gradual increase or decrease, or a sudden drop.

Knowing the ins and outs of these movements will prevent you from buying or selling at the wrong time, such as buying at the peak or selling at a temporary dip. These charts create patterns that you, as a trader, can follow to determine the correct entry and exit points. While they’re not without flaws, they can assist you in making educated trading decisions.  

## How Does the Foreign Exchange Market Work?

The foreign exchange market is frequently referred to as the forex market. Investors can buy and sell various currencies around the clock, five days a week, ideally realizing a gain. As with most investments, prices can be affected by market sentiment and economic indicators. The goal is to buy low and sell high. Candlestick charts are popular for technical analysis in the forex market because they visualize price movements and identify potential trading opportunities.

## Where Is the ‘Real Body,’ and What Does It Indicate?

The body or “real body” of a candlestick chart compares the opening price and the closing price of a security so an investor can gauge which is higher and which is lower. It appears in the center of the chart as black/red if the stock closed lower or white/green if the stock closed higher.

## How Do I Interpret the Harami Cross?

The Harami Cross appears as a small candlestick effectively tucked inside the larger one. It can be a flag of an upcoming trend reversal.

## The Bottom Line

Candlestick charts depict the open, closing, high, and low prices of a security over a designated time. The shape can shrink or enlarge depending on the relationship between these prices. The color of the wide part of the candlestick indicates whether the stock closed higher or lower than the previous period.

As with all trading tools, you’ll want to be sure that you have a firm grasp of how a candlestick chart works before you invest money based on its interpretation and implications.