How to Read Candlestick Charts?
Candlestick charts where originally invented by Munehisa Homma in the 18th century, and the purpose of the candlesticks is to give the investor information on how the stock market behaved with just taking a look at the candlestick
This is by far one of the most used tools by investors and traders since it provides an easy visual guide to understand the current trend of any securities
Candlestick can show the information for 1 minute, 5 minutes, 15 minutes, 1 day, 1 week, etc. in only one candlestick since the user can set this parameters on the chart
Anatomy of a Candlestick Chart
Basically there are 2 types of candlesticks, a bullish candlestick which can have either a green or white body and a bearish candlestick which can have either a red or black body. Most of the Technical Analysis software and websites uses the Green and Red candlestick format
A candlestick provides the following information:
- Share Price when the market opened
- Share Price when the market closed
- Highest Share Price of the day
- Lowest Share Price of the day
This is the very basics of candlestick charts
What other information can be extracted?
Besides the share price information, investors and traders uses candlesticks to interpret the general sentiment of the trading day.
Small or no wick with long body: In the case of a bullish candlestick it means that the trade was dominated by the buyers (bulls) and the opposite for a bearish candlestick (sellers)
Long and short wick: In the case of a bullish candlestick it means that there was a high pressure from the bears (sellers) but the bulls (bears) managed to keep control of the trade, the opposite applies for a bear candlestick.
Long wick and short body: This kind of candlestick indicates indecision by the bull and bears and generally this kind of candlestick might indicate an interruption or change of the trend
There are several different types of candlestick patterns that needs to be studied in order to become proficient with candlestick chart reading.
Shopify (TSX) Candlestick Chart Example
On the shown candlestick chart for Shopify, there are many critical patterns that indicated a possible (and later confirmed) change of the market trend. At the beginning of the chart there’s a doji candlestick which indicated indecision a day after the market responded with a gap up confirming a change of the trend
Later on 2 doji candlesticks appeared on the chart and the bullish trend got interrupted, later on a hammer candlestick appeared indicating the possibility of a trend change which got confirmed by a gap down and a long bearish candlestick.
There are other candlestick and candlestick patterns on this graph but the previous examples should be enough for you to understand that Candlestick Charts and Technical analysis has to be a part of your toolbox while investing or trading