Candlestick Charts

If want to be a good trader you have to be able to read a price chart.  It is essential.  Price charts give us an idea when we should pull the trigger on trade.

Investors or trader that are ignorant to what information a chart holds are just stupid.  Its like jumping into a pool blindfolded that someone says is full, but is in fact empty and you don't take a look before jumping.

Types of Charts

There are 4 types of basic charts

1. Area Chart
2. Line Chart
3. Bar Chart
4. Candlestick Chart

Area Chart                                                                          Line Chart

Bar Chart

These charts all have some interesting aspects, but the one that that traders should focus on is a candlestick charts.  There are my absolute favorite because of how much information they hold.

Candlestick Charts

The most important part about short term trading is price.  There is no substitute!  If you only had candlesticks on a chart and nothing else you could be a very successful trader.

If we break a candlestick chart there are only two groups buyers and sellers.

 

The basic building block of a candlestick chart is a candlestick.  Above is what the price will do when buyers are in control and when sellers are in control.  The "body" is formed between the open and the close.  The "tails" or "wicks" are where the during the day there is a high or low.

When a stock closes at the top of the price range or near the high this is usually suggesting aggressive buying. We usually see this kind of activity when the price overall begins to trend up.

When a stock trades down during the day and closes toward the bottom of its range this is often a characteristic of heavy selling.  These candlesticks will usually occur during a sell off where are traders willing to sell it at any price just to get out.

 There are two types of ranges in candlesticks wide and narrow.  A wide or long candlestick indicates there is high interest in the stock and and narrow or short candlestick says there is very little interest in the stock.

The arrows illustrate that when there is a wide range candle the price will usually move in that direction.  Pay attention to this point. Large price expansion is most likely to highlight interest in the stock.

 

The main thing you have to understand about a candlestick is that it is a struggle between buyers and sellers and it can tell you a story about what is happening during the day.  If we combine reading these "stories" at places like support and resistance it can make it even more compelling to enter a trade.

The picture below is an inverted hammer, but what it is called is not important.  The question you have to ask yourself is what happened, what caused this price to end up this way.

The first thing is that the stock opened with the seller in control, then at some point during the struggle the bulls were able to push the price up.  But because this had sellers in control  they pushed the price down to the lows and when it closed it closed at the lows of the day.

This kind of candlestick is a very bearish.

Its not important what they call these or what patterns they form.  If you understand what they represent and what story they are telling you can be very successful at critical points in you trading.

A site I suggest if you want to learn more about candlesticks is Candlesticker.com.  It has a lot of patterns that you can look at, but the most important thing to remember is why the price forms they way it does and what implications it has for future price movement.