Finance Glossary

Understanding Candlestick Charts

Understanding Candlestick Charts

A candlestick chart is a useful tool for understanding a stock’s behavior in the marketplace, and is often used to gauge investor sentiment. Each “candlestick” in the chart represents stock behavior for a particular day. The “body” of the candlestick is the space between the opening and closing price of the stock for that day. If the stock opened higher than it closed, than the body is colored white or green (depending on preference), indicating bullish behavior. If the stock opened lower than it closed, than the body is colored black or red, indicating bearish behavior. A long white/green candlestick denotes significant buying pressure, while a long red/black candlestick indicates significant buying pressure.

 

Image Credit: Probe-meteo.com (CC by 3.0)

 

In addition to the opening and closing price, the candlestick also shows the highest and lowest price the stock achieved that day. The upper and lower sections extending between the body and these points, which look like wicks extending from a candle, are referred to as shadows. The shape of the body in relation to a wick can tell gives an analyst key information about stock behavior. For instance, a common bullish pattern that resembles a hammer occurs when the stock drops after open, but then rallies near the high value at close.

 

The candlestick chart derives from a system used in eighteenth-century Japan to track the price of rice. It can be used to track any liquid asset such as stocks, foreign exchanges and futures. It is important to not look at a single candle in isolation. but patterns that emerge over a course of several days. Candlesticks are limited in that they do not explain why the price rose or fell, or give a specific timeline of when changes occurred throughout the day.

 

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