Candlesticks 101 – First Lesson in How to Read a Candlestick Chart

The most basic skill needed for investing is the ability to read a stock chart and then understand how that data can aid your investing success.  One of the biggest mistakes of today’s investors is overlooking this basic skill and shooting from the hip.  This article explains the importance of candlesticks which are the smallest building block of stock charts.

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Candlesticks are typically one of four colors.  Sometimes you will see green candlesticks represented by hollow and black-filled candlesticks. These candlesticks represent the price closing higher than the open price. The black and red-filled candlesticks represent the price decreasing on that day.

LONG VERSES SHORT BODIES

The longer the body of a candlestick, the more the pressures for the stock to increase or decrease in price verses the opening price. A short bodied candlestick represents a consolidation of price where buyers and sellers were more in agreement on what the price of the stock should be.

LONG HOLLOW or GREEN CANDLESTICKS show STRONG BUYING PRESSURE.  The longer the body the farther the close was from the open and the more the price increased from the opening price. Often this represents strong BULLISH pressures but this is also dependent on VOLUME and the pattern that the prior candlesticks have created. If this long green or clear bodied candlestick occurs at the bottom of an extended period of price decline, it might show that the bulls have dug in and set a price that they feel is too low. If they defend this price and continue to buy at this price forcing the stock up in value, it is called a RESISTANCE PRICE.

LONG BLACK or RED CANDLESTICKS show STRONG SELLING PRESSURE.  If the long bodied candle was RED or solid black, it might show panic where those who had held on to the stock admitted that the stock would fall or it might show that an institution was ready to dump a large block of their holdings to take profits.

LONG VERSES SHORT SHADOWS. The upper and lower wick or shadows can show very valuable information about a trading session. Upper Shadows represent the day’s high price and the Lower Shadow represents the day’s lowest price. Days with short shadows indicate that most of the trading happened near the open and close prices. Candlesticks with long shadows show that buyers and/or sellers fought loosing battles to bring the price higher or lower. When the top shadow is long, it shows that the buyers (also called the bulls) fought to take the price higher and lost as the sellers (or bears) pulled the price down again. The bottom shadow represents the sellers driving the price down and the buyers helping to pull it back up again.