Red candlesticks represent a downward price movement where the close is lower than both the open and prior close. The candlestick is composed of the period's high and low, represented by the shadows, and the open and close, represented by the real body.
Charts are an integral part of technical analysis. Many technical analysts prefer candlestick charts since they convey a lot of information at a glance. For example, a red candlestick quickly conveys that the price moved lower during the period, as well as the open, high, low, and close. The longer the candle, the greater the price movement over the period.
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Most charting software will allow you to change the colors of candlesticks, but the three most commonly used colors are black filled, red filled, red hollow, and black hollow.
Each color conveys a different meaning:
The two most common types of candlesticks are black hollow candlesticks, which are indicative of a strong uptrend, and red filled candlesticks, which are indicative of a strong downtrend. Red hollow and black filled candlesticks are less common since they are typically indicative of an upcoming reversal rather than a continuation of an existing trend.
By knowing these differences, technical analysts can quickly glean a lot of information from the color of a candlestick before looking at any aspects of the chart. For example, a black filled candlestick might suggest that the price is becoming top-heavy, while a red filled candlestick represents a clear and strong downtrend. Traders may use these insights to gauge market sentiment at a glance.
Most traders use candlestick charts in conjunction with other forms of technical analysis to maximize their risk-adjusted returns. For example, they may gauge market sentiment using candlestick charts and then use chart patterns to identify potential areas of breakdowns or breakouts. Technical indicators can also be useful as a confirmation of market sentiment. For example, the relative strength index (RSI) may be used in conjunction with candlestick charts to show how strong a trend is in a given direction.