How To Interpret A Candlestick Chart

A Candlestick Chart is a tool used to mark the changes in the price of a security and facilitates investors and brokers in analyzing those changes for making buy or sell decisions. In this chart, price is the ultimate factor. Everything else takes a back seat.

In a Candlestick Chart, each candlestick represents the trading activity for each day. There will be one candlestick per day. The body of the candlestick extends between the open and close price. The bottom horizontal line of the body represents the open price while the top horizontal line represents the close price.

Protruding above or below the horizontal lines are “wicks” or “shadows” The lower shadow extends from the open price to the day’s lowest price while the higher shadow extends from the close price to the highest day’s price.

Color of the Candlestick Body

The candlestick is white or hollow when the close is higher than the open, indicating buying pressure, and black or filled when the close is lower than the open, indicating selling pressure.

Size of the Candlestick Body

The size of the body depends on the gap between the open price and the close price. The longer the candlestick, the more intense is the buying or selling pressure. Conversely, a smaller candlestick indicates little price movement, low interest on the stocks and consolidation.

Length of the Shadows

The upper shadow represents session high and lower shadows the session low. Candlesticks with long shadows show that prices went way above/below  open and close. On the other hand, candlesticks with shorter shadows signify that trading activity was concentrated just near the open and close.

For example, a short body atop a long lower shadow indicates that sellers dominated trading for part of the day before conceding to buyers later in the session.

Conversely, a short body below a long upper shadow goes to show that buyers were in control during the session, and bid prices higher. However, sellers later pulled prices down and the weak close created a long upper shadow.

Doji

When the open and close prices are almost the same, a Doji is formed. The candlestick now looks like a cross. A Doji normally indicates a standoff where buying pressure or selling pressure failed to dominate one another. After a drastic advance, the Doji may serve as a signal that the buying pressure or selling pressure that has caused the advance might have already reached its peak and a change in the price’s direction may be imminent.

Marubozu

When a candlestick does not have upper and lower shadows, it is a Marubozu. A Marubozu (depending on the color) indicates that either the buyers or the sellers had complete control of the price.

Conclusion

Mastering how to interpret the Candlestick Chart will not only lead you to a smoother path in your investment career, it will also allow you to face the future without fear that your financial status might be incinerated.

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