Let’s face facts, nearly everyone has heard about day trading before. However, a lot of people may feel overwhelmed when they hear the term ‘day trading’, because they think there is too much to learn. Well, when you’re learning how to day trade, you need to take bite-sized chunks. Otherwise, you would be overwhelmed. That’s why we created this day trading for dummies series.
Now, that doesn’t mean you’re a “dummy”, it just means we simplified things for those who don’t have a finance background. Many traders use charting tools, and it’s something that we feel beginners should understand. That said, let’s take a look at reading candlestick charts in this day trading for dummies series.
How to Read Candlestick Charts
There are various types of charts out there, and some include more information than others. Line charts are basic and only include a specified price, whether it be open, high, low or close. On the other hand, candlestick charts offer a wealth of information.
There are plenty of free charting tools out there, and your brokerage platform should include these tools. If you’re also looking to get into options trading – check out how you could potentially multiply your money!
Getting back. Here’s a look at a line chart of Apple Inc. (AAPL).
In the chart above, closing prices are plotted. While some traders like to use this, this chart is missing a lot of other key pieces of information. Did the stock open above its closing price in this period? What was the high in the period? We don’t know any of this with a line chart.
Here’s a look at AAPL over the same timeframe.
You’ll notice a lot of differences here. This is a stock candlestick chart. If you don’t know how to read stock charts, candlestick charts specifically, don’t worry. This is exactly what this day trading for dummies guide is all about.
The green bars, or candlesticks, indicate the stock closed higher than where it opened. The opposite is true with red candlesticks.
Candlestick Charts Are Powerful
When you look at a candlestick graph, it lets you know exactly whether traders are bullish and bearish over that period. As day traders, you need to understand you might want to look at shorter timeframes. On the other hand, longer-term traders and investors may look at different timeframes.
For the most part, you would want to look at the daily chart first to see what’s going on with the price action. Thereafter, for day trades, you want to look at either the 5-minute, 15-minute, 30-minute or hourly chart. In other words, you should be focused on the price action over the past few days or weeks. You don’t really care about the big picture here.
Now, it’s important to know that understanding candlesticks is more of an art form than a science. In other words, just because you buy a stock due to a bullish pattern, it doesn’t mean the stock will go up. However, that doesn’t mean these strategies aren’t profitable.
An Example Candlestick Graph
Candlestick charts allow you to be more precise with your entries and exits as well. For example, let’s say you like to use moving averages. In other words, if a stock breaks above a key moving average, you would look to buy. With candlesticks, you’re able to precisely define whether a stock closed above or below a moving average. Here’s a look at AAPL on the hourly chart, with the 20-period moving average.
This is only one of the many day trading for “dummies” strategies. If a stock breaks above a key simple moving average, there’s a high probability the stock could continue higher.
Let’s say you saw this and realized you could use the 20-period simple moving average (SMA) as support. That means when you buy the stock, you could use it as a stop. In other others, if the price breaks below this moving average, you would be out of the stock.
That a look at the same chart, but with just a line plot now.
There’s a lot less information here, and you miss areas where the stock gapped up or down, which is pertinent when you’re day trading.
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The Bottom Line
In this day trading for dummies series, we’ve gone over stock candlestick charts and why you should use them. Candlestick charts let you know the open, high, low and close prices for a specified period, unlike line charts. Moreover, candle graphs allow you to be more precise with your entries and exits. Not only that, there are bullish and bearish candlestick patterns that could signal when you might want to buy or sell a stock.
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