Candlestick charts are the first known style of chart analysis. As you look at this chart, it is made up of many red and green bars which are called candlesticks. They are called candlesticks as they resemble a candlestick with a wick coming out the top and bottom.
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The Green candlesticks represent one time period where the stock increased in value. The Red candlesticks represent a time period where the stock decreased in value. The time period that each candle represents can be anything from a minute to an hour, to a day or even a month. If we are building a chart that represents a day, we might specify that each candlestick represents a minute or five minutes. If we were trying to build a chart for a year, we might specify that each candlestick represents a day or a week.
Candles are really EASY to understand. We need to start with the OPEN PRICE of a stock, the CLOSE PRICE of a stock, the HIGHEST PRICE the stock hits during the day and the LOWEST PRICE the stock hit. All these pieces are illustrated in a candlestick.
Let’s start with a candlestick that represents a stock increasing in price for one time period. The body of these candlesticks are GREEN.
The OPEN PRICE of the stock is the top of the body.
The CLOSING PRICE of the stock is the bottom of the body.
The Body of the candlestick is green to represent the stock increasing in price for the day.
The HIGHEST PRICE for the day is the highest point of the upper wick. The upper wick is called the UPPER SHADOW.
The LOWEST PRICE for the day is represented by the lowest point of the lower wick. The lower wick is called the LOWER SHADOW.
This illustration quickly shows the action of the price during the entire day. In another class we will discuss how a single candlestick along with volume will give any investor valuable information about the future direction of the market.
Let’s now look at a candlestick that represents the stock value going down for the day. As you might guess, this candlestick is RED to identify the loss.
In the case of a red candle, the OPENING PRICE is seen as the bottom of the candle body.
The CLOSING PRICE is the top of the candle body.
The bottom of the lower wick is the LOWEST PRICE the stock hits during the day.
As you would guess, this lower wick is called the LOWER SHADOW.
The top of the upper wick represents the HIGHEST PRICE the stock reaches and just as with the green candle, the upper wick is called the UPPER SHADOW.
Sometimes you will see green candlesticks represented by hollow and black-filled candlesticks. In these cases the hollow candlesticks represent the price closing higher than the open price. The black-filled candlesticks represent the price decreasing on that day like a red candle.