If you are into trading on the Stock market, knowledge on Candlestick charts comes in very handy. These little red and green bars can provide you a wealth of information to help you formulate your strategies. In this article, we will look at the basics of reading a candlestick chart.

Why is it called a Candlestick?

These little green and red bars appear in the shape of a candlestick with a piece of rope on either side of the candle.

What is a Candlestick Chart?

A candlestick chart represents the movement of the prices of a stock/share over a given period of time, in a given frequency. Each candlestick represents the frequency in which the chart was set to be; eg. hourly, daily, weekly, monthly, etc.

Look at the candlesticks below for a graphical representation.

What do the wicks on candlestick charts mean?

The ‘high’ and ‘low’ lines or ‘wicks’ on either side of the stick tells us the largest increase or decrease in price the specific stock experienced within the time period. For an example; if a stock opened at $10/share and dropped down to $8/share and then rose back up to $13/share and closed at $12 a share, its open would be at $10, low would be at $8, closing at $12 and high at $13.

Also it is not mandatory for every candlestick to have these high and low lines stretching out of the ‘body’ of the candlestick. For an example, if the stock opened at $10/share and kept on increasing until $12/share and closed there, it would only have a $10 opening and $12 closing.

Each new time interval (Eg: day, week, month) will form a new candlestick to the right of the existing candlestick in the chart.

Bullish Candlestick vs Bearish Candlestick

In a previous article, we discussed with Bullish and Bearish markets are. However, in simple terms, a Bullish candlestick is where the stock price closed at a higher price than it opened. A Bearish candlestick is where the stock price closed lower than it opened.

Similar to bullish and bearish conditions, colors are used to make these patterns more visual at a glance. A green candlestick signals that the share price closed higher than what it started within the time period. A red candlestick signals that the share price closed lower than what it started within the time period.

How do you read Candlestick Charts?

Reading a Candlestick Chart is easy. These tiny little bars of red and green provide valuable information for stock trading. Let us go into details with these sample charts.

We will attempt to read the below candlestick chart now.

In the chart above, we can notice hourly candlesticks marked on a daily labeled chart. At a glance, we can see that from May 01 to May 05, there is an upward trend in the price fluctuation. Hence, this period can be identified as a bullish market. After May 05, the share price has gradually gone down. This portion of the chart shows bearish qualities.

Candlestick Chart: Support and Resistance

In reading candlestick charts, we can often identify the support level and resistance level of the stock.

Support level: this is a level at which the stock price tends to find support when it falls down. The observed norm is that stock price tends to recover (or increase) when it hits this imaginary level of support. However, if the price does breakthrough the support level by a significant amount, the normal belief is that it will continue to fall down until it finds another support level.

Resistance level: this is the level at which the stock price tends to find resistance as it increases. Much like the behavior of ‘support level,’ the stock price will bounce down from the resistance level. Also, should the price breakthrough the resistance level significantly, it will rise up until it hits a new resistance level.

For a stock trader, these signals can provide vital information on when to buy and when to sell.

Is candlestick charting reliable?

Isn’t this the ultimate question! While Candlestick Charts do provide some valuable insights into the behavior of stocks, they are not 100% reliable. Everybody in the market sees the same candlestick chart you do and everybody will act the same depending on it, thus reversing the entire behavior of the trading pattern.

Note: It is also very important to note that the stock market or share prices do not obey a set of set principles as above. There is always a % of error and deviation from the norm. However, these patterns will give you some guiding light to the otherwise chaos of the stock market behavior.

Candlestick charts are used for many advanced analyses called ‘technical analysis’ used in stock market trading. These analyses help us better predict the market behavior. More on them in a later article.