Candlesticks 101 1
The most basic skill needed for investing is... the ability to read a stock chart and then understand how that data can aid your investing success. One of the biggest mistakes of today's investors is overlooking this basic skill and shooting from the hip. 2
The Basics 3
The what (price action) is more important than the why (news, earnings, and so on) All known information is reflected in the price 4
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Markets fluctuate The actual price may not reflect the underlying value 6
Line Graph Bar Graph Candlestick Graph 7
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Level of RESISTANCE Price per share has NOT been able to "Break through" a certain point 9
Level of SUPPORT Price per share has NOT been able to "Go Below" a certain point 10
Candlesticks are the smallest building block of stock charts Each candlestick represents a time period - could be minutes, hours, days, weeks, months or whatever time period YOU set them up for. In order to create a candlestick, you must have a data set that contains the open, high, low and close values for the time period desired 11
Green Candlesticks or hollow candlesticks Represents the price closing HIGHER than the opening price What kind of trend? A Bullish Trend 12
Red Candlesticks or filled candlesticks Represents the price closing LOWER than the opening price What kind of trend? A Bearish Trend 13
Each candlestick has 2 major parts... Body Shadow or (Wick) Body Represents the difference between the opening price and the closing price A Green or hollow candlestick Top of of Body Body = Closing = Closing Price Price Bottom of of Body Body = Opening = Opening Price Price A Red or filled candlestick Top of of Body = = Opening Price Price Bottom Bottom of of Body Body = Closing = Closing Price Price 14
Body Each candlestick has 2 major parts... Represents the difference between the opening price and the closing price The longer the body the more intense buying or selling pressure A Green or hollow candlestick long body indicates price increased significantly from open to close - buyers were aggressive. What kind of trend? Generally = Bullish depends upon their position within the broader picture 15
Body Each candlestick has 2 major parts... Represents the difference between the opening price and the closing price The longer the body the more intense buying or selling pressure A long body Green or hollow candlestick Potential Trend... 1. After extended declines - could mark a potential turning point or support level? 2. After a long advance - If buying gets too aggressive it could lead to excessive bullishness? 16
Body Each candlestick has 2 major parts... Represents the difference between the opening price and the closing price The longer the body the more intense buying or selling pressure A Red or filled candlestick long body indicates price decreased significantly from open to close - sellers were aggressive What kind of trend? Generally = Bearish 17
Body Each candlestick has 2 major parts... Represents the difference between the opening price and the closing price The longer the body the more intense buying or selling pressure A long body Red or filled candlestick Potential Trend... 1. After a long advance could mark a potential turning point or resistance level?? 2. After a long decline could indicate panic? 18
Body Each candlestick has 2 major parts... Represents the difference between the opening price and the closing price The longer the body the more intense buying or selling pressure Short body represents a consolidation between buyers and sellers indicates little price movement a point where buyers and sellers were in agreement on what the price of the stock should be 19
Each candlestick has 2 major parts... Body Shadow or (Wick) Represents the highest and lowest price of the day The high price of the day is The marked high by is marked the top by of the the top of the upper upper shadow shadow The The low low price is marked of the by day the is marked bottom by of the the bottom lower of shadow the lower shadow 20
Candlesticks with short shadows indicates that... most of the trading action was confined near the open and close 21
Candlesticks with long shadows indicates that prices extended well past the open and close 22
Candlesticks with long upper shadows and short lower shadows indicates that buyers dominated during the session and bid prices higher but, sellers forced prices down from their high the weak close created a long upper shadow 23
Candlesticks with long lower shadows and short upper shadows indicates that sellers dominated during the session and drove prices lower but, buyers forced prices up by the end of the session the strong close created a long lower shadow 24
Bulls Versus Bears A candlestick depicts the battle between Bulls (buyers) and Bears (sellers) over a given period of time An analogy to this battle can be made between two football teams ~ the Bulls and the Bears The bottom of the candlestick represents a touchdown for the Bears and the top a touchdown for the Bulls The closer the close is to the high the closer the Bulls are to a touchdown The closer the close is to the low, the closer the Bears are to a touchdown. 25
Who wins this game - Bears or Bulls? 1. Long green, hollow or white candlesticks indicate that the Bulls controlled the ball (trading) for most of the game. 26
Who wins this game - Bears or Bulls? 2. Long red, black or filled candlesticks indicate that the Bears controlled the ball (trading) for most of the game. 27
Who wins this game - Bears or Bulls? 3. Small candlesticks indicate that neither team could move the ball and prices finished about where they started. 28
Who wins this game - Bears or Bulls? 4. A long lower shadow indicates that the Bears controlled the ball for part of the game, but lost control by the end and the Bulls made an impressive comeback. 29
Who wins this game - Bears or Bulls? 5. A long upper shadow indicates that the Bulls controlled the ball for part of the game, but lost control by the end and the Bears made an impressive comeback. 30
Who wins this game - Bears or Bulls? 6. A long upper and lower shadow indicates that the both the Bears and the Bulls had their moments during the game, but neither could put the other away, resulting in a standoff. 31
What Candlesticks Don't Tell You... Candlesticks do not reflect the sequence of events between the open and close only the relationship between the open and the close The high and the low are obvious and indisputable candlesticks (and bar charts) cannot tell us which came first. 32
What Candlesticks Don't Tell You High Low Sequence Candlesticks offer valuable information on the relative positions of the open, high, low and close With a long white candlestick, the assumption is that prices advanced most of the session However, based on the high/low sequence, the session could have been more volatile two possible high/low sequences that would form the same candlestick two small moves and one large move: a small decline off the open to form the low, a sharp advance to form the high, and a small decline to form the close portrays strong, sustained buying pressure, and would be considered more bullish three rather sharp moves: a sharp advance off the open to form the high, a sharp decline to form the low, and a sharp advance to form the close reflects more volatility and some selling pressure 33