The foundation of all technical analysis is the fact that the only thing that matters is the asset’s past trading data (price and volume) and what information this data can provide about the future movement in the asset.
To technical traders, ‘how’ the price moved is more important than ‘why’. They believe that when prices move, market forces move prices in a trend and because market psychology is what drives these movements, they also believe that history always repeats.
Hence looking and understanding the price graph is pivotal to success in TA and candlestick graphs help us do exactly that.
Parts of a candle
Let’s try and look at trades that happened in an imaginary stock in a given period of time.
We can see that in the given period, the price mostly oscillated and continued to move around randomly. Getting relevant information out of raw trading data like this is next to impossible and what we need is a summary.
The above graph can be very neatly summarized by just 5 pieces of information which are
Open Price — The first price at which the asset was traded in the given period
High Price — The highest traded price in the given period
Open Price — The lowest traded price in the given period
Close Price — The last price at which the asset was traded in the given period
Volume — The number of trades that happened in the given period
Using these basic data points we can create what is called as a price bar or a candle.
The open, high, low, close prices and volume of trading are the main data points from the technical analysis perspective.
These candles are then plotted on a graph over a time range using which we get our price graphs which then help us find trends in prices and visualize how they are moving.