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What Is a Candlestick?

February 11, 2022

5m

Read Time

Reading charts is a fundamental part of the trading and investing experience. While they may seem complicated to the beginner, the truth is that charts simply offer a visual representation of historical price movement. The typical fashion in which prices are visualized is with so-called candlesticks (or simply candles.)

In this lesson, we will explain what a candlestick is, analyze its main components, and show you how to read one. Being new, this is the most important lesson for you, and it is critical for your further understanding of cryptocurrency trading.

What is a Candlestick Chart?

A candlestick chart is a type of chart that is visualized with red and green candles. Each candle represents one unit of time frame denominated in minutes, hours, days, weeks, and even years. Candlesticks can represent lower or higher time frames.

Lower time frames are typically minutes, and they include:

  • 1m
  • 5m
  • 15m
  • 30m
  • 45m

On the other hand, higher time frames are perceived differently, and they vary person by person. Some investors think of weeks as being higher time frames, while for some, four hours or even one hour is long enough for high timeframes.

Popular higher time frames include:

  • 1H
  • 4H
  • 12H
  • 3D
  • 1W

In terms of information, candlesticks visualize five pieces of incredibly important data which traders commonly refer to as OHLCV - Open, High, Low, Close, and Volume. However, do keep in mind that traditional candlesticks visualize no sort of data in regards to volume. Instead, this is shown elsewhere on the chart.

To provide a better understanding, we will cover each major component independently. We recommend observing the illustration below while reading the OHLCV components.

Open Price (O)

The Open Price is the price of the asset at the start of the candlestick period. More specifically, it is the price of the first trade that was made in that period.

Example: Imagine we had a 1-day candlestick period. The open price would be the price of the first trade that day. As an example, if the first trade for the BTC/USD trading pair was for $8,000.00 at 12:01 AM today, the Open Price for today’s BTC/USD candlestick would be $8,000.00.

High Price (H)

This candlestick demonstrates what it would look like if the first trade in the candlestick period was also the highest price of any trade.


This candlestick demonstrates what it would look like if the first trade in the candlestick period was also the highest price of any trade.

The High Price is the highest price of any trade made during a candlestick period. That means no matter how the price increased or decreased over the period, the trade with the maximum price in the period is marked as the High Price.

Notice the High Price is not necessarily always different than the Open Price, Close Price, or even the Low Price.

In the illustration to the right, we see an example of how the High Price is the same as the Open Price. This indicates the Open Price was the highest price of any trade completed in the candlestick period.

Low Price (L)

This candlestick demonstrates what it would look like if the first trade in the candlestick period was also the lowest price of any trade.

This candlestick demonstrates what it would look like if the first trade in the candlestick period was also the lowest price of any trade.

The Low Price is the lowest price of any trade made during a specific candlestick period. Regardless of how the price goes up or down over the course of a candlestick period, the trade with the lowest price will be marked as the Low Price.

Notice it is possible for the low price to be the same as the Open Price, Close Price, or even the High Price.

In the illustration to the right, we demonstrate an example of a candlestick that has the Open Price and Low Price as the same. This suggests the first trade in the candlestick period was the lowest price of any trade in the period.

Close Price (C)

The Close Price is the last trade in a candlestick period. This closing price completes the candlestick and represents the price of an asset at the end of the time interval.

The relation of the Close Price to the Open Price also determines the color of a candlestick. When the closing price is higher than the opening price, the candlestick is colored green. If the closing price is lower than the opening price, the candlestick is colored red.

A closing price above the opening price means the asset increased in price over the candlestick period. On the other hand, a closing price lower than the opening price means the asset decreased in price over the candlestick period.

Note: Some exchanges or charting tools will use other colors besides green or red. In those cases, we need to check to see which color represents an increase in price and which represents a decrease in price.

Volume (V)

Although Volume is not included within the components of a candlestick, we will still take a moment to discuss the importance of Volume.

Volume is the total amount that was trading during the period of a candlestick. Most often, this volume is displayed in terms of the base currency. That means for a trading pair like BTC/USDT, the volume would be in terms of BTC.

The Volume is calculated by summing the amount included in each individual trade.

How to Read Candlestick Charts

Now that we have an understanding of the different components of an individual candlestick, it’s time to put our knowledge to the test by reading a full candlestick chart. In the following image, we can see a chart that was taken from Coinbase Pro.

Price run.png

The green arrow is not part of the chart. It was added to show the trend during that section in the graph.

We can see there was a long run of continuously green candlesticks. This occurrence represents an increasing price for the asset. After each green candlestick, the price of the asset was higher than when it began the candlestick.

Similar to increasing trends, we can also see how the graph looks when the price of an asset decreases.

The above image highlights a flash crash. In less than one hour, the price went from just over $9,500 to a low of nearly $8,000, before climbing back to around $8,750.

We can see the long tail that reaches the level marked as “low”. That means the price went all the way down to that point, before rising back up to the closing value marked “close”.

That entire price movement happened in less than 1 hour since we can see the “1h” interval is selected in the top left corner of the graph. That means each individual candlestick includes exactly 1 hour's worth of trades.

About The Author:  
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.

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