A Red Candlestick is an illustrative way of reflecting negative Price Action over a given period of time.
The horizontal bars of a Red Candlestick represent the opening and closing prices and the box between these two levels is referred to as the ‘body’ or ‘real body’. A Red Candlestick body reflects that over that time period the closing price was below the opening price.
The vertical lines represent the range of price action during the period. The highest point of the upper shadow reflects that period’s trading high and the lowest part of the lower shadow reflects the low of the time period.
Short shadows denote a price action to have been within a small range, longer shadows denote a greater price range.
[It’s worth noting that color choice is arbitrary, and some follow the practice of coloring the bodies of negative candles black instead of red.]
Candlestick charts are simple in design and present a way to clearly and quickly convey price action. It is also possible to grade the strength of the signal.
- The Candlestick on the far-right hand side is the most ‘Bearish’. It has a long upper shadow that suggests at some part of the trading period bullish traders bought heavily and drove prices up. By the end of the time period strong selling pressure had taken the price back below the opening price and continued to make new lows. The closing price being close to the low point of the period suggesting sellers finished the session on top.
Candlesticks are a method of understanding prices action and their use can be extended over all markets and tradeable instruments.
Trading strategies based on Technical Analysis take things one step further and might use Red Candlesticks as guides to enter into short positions or close out long positions. It should be noted that trading solely off Candlesticks whilst possibly profitable would not be taking account of other market information that is readily available. Many other signals, such as traded volumes, Pivots and Support and Resistance levels can be used in your strategy to act in conjunction with the candlestick analysis. Moreover, the information is widely available free of charge including from Broker Platforms.
Different time periods can be selected, those typically available range from 1m (one minute) through to 1y (one year) but the design characteristics of the candlestick are constant regardless of the time period or instrument to which they are applied. A Red Candlestick formed by data taken over a longer time period is considered to offer a more reliable signal on the basis that more market participants have been involved in generating the selling pressure to make prices fall.