Most of the previous articles in this series have focused on price as reflected by a series of bars or lines on a basic bar chart, each bar showing the high, low and closing price for a designated period. Taken together, these individual bars represent the mass psychology of the marketplace, sometimes showing up on charts as trends or patterns or just choppy action.

However, each bar itself can reveal more information about market thinking than just the day’s high, low and close. Sometimes, bar charts include a little notch on the left side of the price bar that shows that opening price for the period. Candlestick charts, on the other hand, provide a much clearer glimpse of market action by focusing on the relationship of the closing price to the opening price for the period.

A candlestick chart shows a period’s high and low just like a bar chart. The significant difference of the candlestick chart is the “body” of the bar. If the close of the period is higher than the open, the body is usually white or clear and suggests a bullish rising market; if the close of the period is lower than the open, the body is usually filled in or black and suggests a bearish falling market. The part of the trading range outside the body — the “shadow” at either end — is important but not nearly as significant as the body. The longer the body, the more bullish or bearish the period’s action is.

Candlestick charts often provide clues to the direction of the market just by looking at one bar. However, as with bar charts, you should not try to read too much into one candlestick bar, and you will find that your interpretation of a candlestick chart can be as subjective as any interpretation of a bar chart. You need to look at the whole chart and overall market action to see how one bar fits into the total picture.

Japanese traders, who have used candlestick charts for many years, have given candlestick patterns some colorful names, adding to their attraction — spinning tops, shooting stars, hanging man, dark cloud cover, engulfing pattern, hammer and a number of others. It is beyond the scope of this basic article to explain all of these patterns — whole books have been written on the subject — but the names of the patterns provide a good description of market action that is likely to follow the candlestick pattern.

The chart illustrates how a candlestick chart differs from a typical bar chart for the same time period. This is a daily chart, but candlestick charts can be used on one minute or weekly or any other time frame in the same way, as long as you have opening and closing prices. Analysis of candlestick charts is still an art that requires some experience, but their advantage is that they provide a quick visual picture of market action within a time period and between time periods.