Candlestick charts have been around for hundreds of years, and are popular tools for American and Canadian traders. Unlike bar charts, candlesticks provide a wealth of information; candlestick charting is complex, and there are multiple patterns you need to understand and recognize before you start trading with them. It’s important to start with the basics, so let’s do that.
Candlesticks provide four key information points: the open, high, low and close. Each candlestick represents the opening, high, low and closing prices in a specified period. Moreover, candlesticks are color coded. Generally, a green candlestick indicates there was an excess of buyers, while a red candlestick indicates there was an excess of sellers. Here’s a look at bullish and bearish candlesticks.
On the left side of the figure above is a bullish candle, while the red candlestick represents bearish trading. Notice the intricacies of these candlesticks. When a stock has bullish trading in a period, a green candlestick is plotted; this occurs if the closing price is higher than the opening price. On the other hand, if a stock’s price in the specified period closes below its opening price, a red candlestick is plotted. The shadows, or wicks, remain the same for both bullish and bearish candles. Moreover, the high and low remains the same for both candlesticks.
Here’s a look at a candlestick chart of the SPDR S&P 500 Index ETF (SPY), on a daily timeframe.
The bottom line
Candlesticks can be more useful than other types of charts, if only because they provide more information. Start by understanding the difference between bullish and bearish candlesticks; once you start looking at more candlestick charts, your basic idea of how this charting technique works will make it easier for you to use properly.
Jeff Bishop is lead trader at TopStockPicks.com. He runs short-term trading strategies, using stocks, options and leveraged ETFs.