Candlestick Charts

A candlestick chart displays high, low, open, and closing prices in addition to indicating whether the opening price for the day ends up higher than or lower than the closing price. The candlestick chart is the oldest type of charting method for determining stock prices. This method can be traced to Japan in the 1700s, where candlestick charts were used for predicting rice prices. As a consequence, the different candlestick shapes and patterns have Japanese names, which add some intrigue to the typical investment terminology. Candlestick charts present an alternative to the use of bar charts to identify price patterns and trends.

In addition to the high, low, and closing prices used by bar charts, candlestick charts use opening prices to show the direction of future stock prices. Each of these four types of information is included in the candlestick diagram, as shown in Figure 11–4. The data conveyed by the candlestick chart include the following:

* The length of the body represents the range between the opening and closing prices. If the closing price is lower than the opening price (normally a bearish factor), the body of the candlestick is filled in (black). When the closing price is higher than the opening price, the body of the candlestick is open or white (normally a bullish sign).
* The line above the candlestick body, called the upper shadow, represents the high price for the stock. The line below the candlestick body represents the low price of the stock. A candlestick with no upper shadow indicates that the stock closed (or opened) at the high price, and a candlestick with no lower shadow means that the stock closed (or opened) at the same price as the low price for the period.

Figure 11-4
Definitions of the Components of the Candelstick Chart


The candlestick chart makes it easy to spot the changes in opening and closing prices. When you see a filled-in real body (black body), you know that the stock closed at a lower price than the opening price of the stock for that day (week, month, or whatever period you choose), indicating a weak close. Similarly, a long open body indicates that the stock closed at a higher price than the open for that day, which is a bullish indication for the stock. Because the different candlestick patterns have many interpretations, a description of them all is beyond the scope of this chapter. Several books have been written on the topic in case you want to explore this charting technique further.

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