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Dec 02 2023
You might have heard about candlestick charts or maybe you have an idea of what they are. This post aims to provide some clarity on the topic.
A candlestick chart is useful for tracking price movement of a stock so that investors can better plan entrances into a position. There are four components of a candlestick:
As seen in the above image, we can see the open, close, high and low compose the candlestick. The color of the candle is dictated by whether or not the close price is above or below the open price. If the closing price is greater than the open, the body of the candle is green and the converse applies to red candles. The ends, or high and low points, represent the extremes on either side for the price of the stock during this slice of time. The middle candlestick, represents a time of indecision by the market, let me clarify. This candlestick shows that the price reached a high/low above/below the open/close but ultimately closed at the open price, which is why the candle doesn't have a body. This means that the buyers and sellers canceled each other out essentially since the open and close were the same price. This candle is known as the Doji which is useful for pattern tracking in technical analysis.
Let me elaborate on this phrase of "slice of time", mentioned above. When I say "for the slice of time" in the bullets, I'm referring to the selected window applied to the chart you are viewing, which dictates the time which each candle is drawn. Imagine that the interval selected for viewing is 5 minutes for the current day, you can expect to see a lot of candles creating chart since that is a small window of time in the trading day. Contrast this with having the selected range be the current day with 1 hour buckets, you'd expect to have less candles comprising the chart. Investors use a combination of different time windows to get a better picture of the price movement of the stock.
Great, now that we have an understanding of these candlesticks, how do we apply them?
Investors that use technical analysis to find patterns and trends use candlestick charts to follow the price movement. In my opinion, these candlesticks are best applied when you are trying to time an entrance into a position. If you can look at historical data and analyze the candlesticks to predict a reasonable entry for your motivations, that's where these charts shine. When you see certain sizes and colors of candlesticks in succession, you can extrapolate that the market is establishing a trend for price movement. There are plenty of patterns out there, so here are a few to get you started:
As for tools to get more acquainted with candlestick charts check these out: