my understanding of candlestick charts is that they are composed of open/high/low/close values of a particular timeframe. Now, if I opt for a, say, hourly chart, this would imply that the opening value of any candle should exaclty match the closing of the previous one, shouldn't it?
However, I frequently observe the oposite in that there are "overlaps" of candles, ie. the closing value of one timeframe is lower that the opening value of the next, or vice versa.
How can this be, as the trading is continous. I could understand this on a dayly chart with no trading during the night - but on an hourly or 15-min chart?
What am I missing?
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Trading and price-setting is not continuous, it's made up of many discrete events. For high-liquidity events under normal conditions they are almost continuous, but not always - see CHF/EUR on 2015.01.15 as a nice example.– PeterisCommented Jan 31, 2015 at 5:11
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2 Answers
Remember that prices refer to discrete events in the market - trades - it is easily possible that the highest price for a trade in the next period is lower than the highest price in the current one as someone in the current period may be willing to pay more in this period than anyone in the next. The ending price of a period is also determined this way; it is the last price that someone was willing to pay in this period not the first price that someone will pay in the next period. Why? because the last price in this period is not in the next period by definition!
edit: added something on illiquid stocks
Illiquid stocks may have intraday gaps in the sequence of candlesticks where no trading occurred. Below is one such chart for 1pm plc.(OPM.L) a UK based leasing company (thanks to Yahoo finance for this):
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well this then means, that there is always a timewise gap between two periods that is not infinitely small. well how big is it?– dlrtsCommented Jan 30, 2015 at 14:30
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its the time difference between the last trade of the previous time period and the first of the next. Note that that could be very, very small, even so close as to be effectively infinitely small if there is high volume and traders are putting a lot of orders in in a small time period.– MD-TechCommented Jan 30, 2015 at 14:33
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1remember that prices aren't created my some magical smoothing algorithm; they are created as a deal between the seller and the buyer.– MD-TechCommented Jan 30, 2015 at 14:35
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1kind of got it - so the value of an asset must be thought of diskrete (points in time where a deal was made) function. If there was no trade within a period, will there be no candle to display?– dlrtsCommented Jan 30, 2015 at 14:39
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The market is simply gapping at these times, some news may have come out that makes the market gap on the open from its previous close.
Being FX, the market in one country might be trading and then at the start of the hour trading in a different country may commence, causing a small gap in price.
Generally many things could cause the price to gap up or down, and these gaps sometime can occur at the start of a new hour or other timeframe you are using. They do tend to happen more often at the start of a new day's trading on a daily chart, especially with stocks.
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1FX trades 24/7 from Sunday 22:05 GMT to Friday 21:50 GMT with different markets overlapping. Although market volatility does increase on market open for the currency pairs that are native to that market the number of breaks on the intraday chart shown means that that is clearly not the case here.– MD-TechCommented Jan 30, 2015 at 13:57
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@MD-Tech - I mentioned this could be a reason for gapping in some instances not all, many things can cause the market to gap at any time. Some new news coming through or even anticipation of the news could cause a gap.– VictorCommented Jan 30, 2015 at 20:36
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