Understanding Candles

The Candlestick 

Imagine a simple line graph for a moment. Each piece of data is represented by a single point and these points are then connected. One to the next. This is helpful to smooth out noise, but far too much useful information is lost. 

Enter the candlestick. In its most basic form, a candlestick is nothing more than a data packet. The data packet consists of a solid “body” and two thin lines called “shadows” or “wicks” Additionally, the candles are coded by color to represent rising or falling price (generally green and red). 

Deciphering the Candlestick



BODY: This is a visual representation of the DIFFERENCE in opening and closing price in a given time period.

SHADOW or WICK: This shows how much the price moved with respect to the body of the candlestick. The longer the shadow the more volatile the price. 

Breaking it down further:

Each candle is a glimpse into the market. When there are more sellers than buyers the price goes down. It will continue going down until there are enough buyers to stop the downward trend. When the price goes up there are more buyers than sellers. There is nobody to buy from and thus the price will rise until it is at a level sellers can no longer resist. 

When buying and selling interest is about the same the price remains static. 

When there is a large imbalance between buyers and sellers the price can move rapidly up or down. 

The following paragraphs will teach you how to use candles to spot these changes in market attitude. 

Messages in Candlesticks

BODY:

The size of the body illustrates the difference between opening and closing price. A large body that is followed by rising prices points toward buying interest. The market often moves sharply in that direction. 

If the size of the body continues to INCREASE it is an indication of trend and momentum. 

When the body size begins to DECREASE it points to decreased interest and a slowing of trend or momentum. 

When bodies remain the same size it indicates a stable market or trend. 

SHADOW:

The shadow represents the entire range of price change over a given time period. Remember the body shows the OPEN and CLOSE, but the shadow represents the entire price range in the period. 

The longer the shadow the more volatile the price in a given direction. A  long shadow indicates indecision between buyers and sellers. 

A short shadow is a sign of stability. 

THIS IS KEY: The difference between a real trend and a false breakout often lies in the shadows. A true trend has short shadows which represent market stability. 

© Stock Scalpers LLC. 

Virginia Beach, Virginia 
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