Candlesticks

Introduction

What are candlesticks? Not the things made of wax. The candlesticks I’m talking about are tools used in technical analysis. Yes, you heard me right. This is used for trading, not investing. I know I always emphasize investing over trading, but I think candlesticks are still a valuable tool in any investor’s handbook.

Candlesticks

Let’s dive into what exactly a candlestick is. It’s a diagram used to depict price movement within a certain period of time. This can be any period of time you want, but it is most commonly one day. Here is a picture of a candlestick:

Information

Every candlestick shows you 4 things: The open, the close, the high, and the low. By open and close, I mean the price that the stock started at at the beginning of the period, and the price that it was at the end of the period. High is the highest price in the period, and low is the lowest price in the period.

Bulls and Bears

There are two types of candlesticks: Bullish and bearish. You may be able to guess what they are. A bullish candlestick occurs when the price goes up during the period, and a bearish candlestick occurs when the price goes down during the period. They are differentiated by color. A bullish candlestick is most often either green or white, and a bearish candlestick is either red or black.

Parts of a Candlestick

So how exactly does that weird looking thing tell us the 4 pieces of information mentioned above? Each candlestick has 2 parts that give us the picture: The body and the wick.

Body

The body is that block in the middle. This tells us the open and the close. Now, unfortunately, since investing is never easy, the body is different for bullish and bearish candlesticks. For a bullish candlestick, the open is the very bottom of the body, and the close is the top. This should make sense since the price increases throughout the period. A bearish candlestick is the opposite. The open is the top and the close is the bottom, since the price goes down.

Wick

The wicks are those sticks at the top and bottom of the body. These tell us the high and the low of the period. Fortunately for us, these remain the same for both bullish and bearish candlesticks. As you might be able to guess, the top wick is the high, and the bottom wick is the low. Check out this incredibly messy diagram for everything we’ve covered so far.

Candlestick Charts

Each individual candlestick contains all that information. But what can we do with it? Well, remember, trading is all about identifying trends. For a candlestick to be useful, we have to see it with other candlesticks. A candlestick chart shows us a bunch of candlesticks within a period. Usually, candlesticks are daily, so we can see the price movement per day over a longer period of time. This is very useful in identifying uptrends and downtrends. My good friend Yahoo Finance has great charts. Just look up any stock and go to the charts tab. I think the default is a line chart, but you can click the dropdown where it says Line and change it to Candle. Here's an picture of a random candlestick chart that happens to not be copyrighted:

Conclusion

Phew! That was a big one. And we haven’t even scratched the surface of technical analysis. Candlesticks are the basis of technical analysis, but we haven’t even covered what we can do with them yet. I go much more in depth into that stuff in my video on technical analysis, so if you’re interested, definitely check that out. I should have some more articles on technical analysis coming out soon too, so stay tuned.