All technical analysis starts with a graph of the  price fluctuations of the particular stock that you are looking at.  There are many different types of charts that represent the price fluctuations, such as line, bar and candlestick. I prefer candlestick charting  because, for my money, it provides the most information in the clearest way possible.   There are many sites on the Internet that will give you advanced, in depth discussions on the how to and the why of reading the various types of charts. This article is an introduction to candlestick charting basics and with it you should be able to determine  what is going on with the stock of your choice on any given day.

Before we get into the candlestick charts, I want to show you and example of a line and bar chart so that you will know what you are looking at when you see them.  This is an example of a line chart for GoldCorp, GG with 50 day and 200 day moving averages superimposed.

Line Chart

The horizontal axis shows time and the vertical axis shows stock price. The upper left hand corner of the chart tells you that the 50 day moving average is shown by the solid blue line and the solid red line represents the 200 day moving average.  The black and red line depicts the stocks price range through out the selected time period.  The black shows the gains, while the red shows the declines.  It is pretty straight forward and provides a good picture of a stock over longer periods of time.

Bar Chart

Like a line chart, the bar chart can cover different time periods from minutes, hours, days to months.  The highest and the lowest prices in the selected time frame are illustrated by a vertical bar. The opening price of the stock is indicated by horizontal mark  on the left side of the vertical bar and the closing price is represented by a horizontal mark on the right side of the bar. The bottom and the top of the vertical bar represent the lowest and highest prices of the selected time frame.

Candlestick Charts

The candlestick chart originated in the Far East and was introduced to the Western World in 1991.  You could spend a ton of time studying candle sticks in all of their various formations, but it is not essential to have a degree in using them before you can get value from them.   Lets start with the basic fundamentals of the candle so that you can get on with making money with your portfolio.

Candlestick charts clearly depict price movements during in a trading period. The body of the candle shows the range between the opening and the closing prices. In the illustration above, if the stock closes above the opening price, the candle body is white. If the stock price closes below the opening price, the candle body black.  These colors can change depending on where you are getting your charts, but as a rule of thumb, if the body of the candle is not filled, the stock closed up.

If a stock opened at $10 and closed at $12 without ever going above or below those two points, the chart would only show a candle body with no shadows or wicks as the lines above and below the candle body are commonly referred to.  The wicks indicate the entire range that the stock traded in during the specified time on the chart.

This 2 month chart of of GoldCorp, GG  has the down days filled in red (and black, when they occur at the end of and the beginning of a new month.)  You can see clearly the days when the stock opened high and fell like a rock and conversely you can see the days when the stock closed up or down and had higher highs and lower lows during that particular trading session.  With just the basic understanding of what the candles represent, it becomes really easy to see which direction the trading action is taking.

By looking at a Candlestick chart you can see and compare the relationship between both the open and the close  as well as the high and low for the day. Hollow, or unfilled candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure.

Size Matters!

To put it simply, the longer the body of the candle is, the more intense the buying or selling pressure.   On the other hand, short candlesticks indicate little price movement and, if they occur over more than a few days, they indicate a developing period of consolidation.

The longer the hollow candlestick is, tells you how far the stock has moved from the opening to the closing price. Long hollow candles tells you that the buyers were aggressive and should lead you to look for the information that they were reacting to.  If there was good news that the buyers were reacting to you have more information on which to base your decision.  In the markets, information is everything.  If a long hollow candle shows up after and extended  extended decline, it could signal a potential turning point or support level and maybe a signal for you to buy in if, that was why you were watching the stock.

The same principles apply to filled candlesticks, only in the reverse. After a gradual lengthy decline, a long filled candle could signal panic or capitulation in the issue.  These are not hard and fast rules, but they should be triggers to get you looking for the reasons why the stock performed the way it did in the session.

You can go on from here and go way deeper into candlestick charting because there are many more formations that indicate different possibilities, but if you understand the principles outlined above, you will be well served when looking at candlestick charts.

Till next time, good luck and good charting!

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