Using Candlestick Charts in Equity Trading

Trading in the financial markets is not a venue for the timid or for someone that is uneducated in technical analysis. One way of increasing your chances of profitability in the financial markets is acquiring knowledge in candlestick chart patterns. Candlestick charts have a long history and it has been said that rice traders in eighteenth century Japan used candlestick charting. Applying candlestick charts to stock trading and viewing past trading history of stocks, can give the stock trader an idea of what the stock may likely do in the future.

Individual candlesticks on a stock chart are unique in shape. The body of the candle is different each day depending on whether the stock closed up or down for the day.

If the stock closed up for the day, the color of the candle will be white or light in color in most cases depending on what setting the stock trader has chosen. Also, the candle body is wide with the upper portion of the candle showing where the stock closed on the day and the bottom showing where the stock opened in the trading session. It should be noted that often times there will be thin lines coming from the bottom and top of the candlesticks, but not always. These thin lines are called shadows and show the range in which the stock traded during the day.

In the case of a shadow on the top of a white candlestick, the shadow shows the high of the day that the stock traded during the market session. A shadow at the bottom of the candlestick would show the lowest point that the stock traded during the day. When a stock has a down day, the candlestick will usually be red or a dark color, again depending on the stock traders preference. The same applies for a down day candlestick with the exception that the bottom of the candlestick will show where the stock closed for the day and the upper candlestick will show where the stock opened on the day, the reverse of a white candlestick.

Candlesticks will vary in length depending on price movement during the trading session for each particular day. On days when a stock is moving higher, the stock will show a long white body since the buying pressure pushed the stock higher. On down days where traders and investors are selling, the candlestick represents the sell off with a long red or dark candlestick. Long white candlesticks show buying pressure and long red candlesticks show selling pressure.

Short and fat candlesticks show that a war was being fought during the session between buyers and sellers with no real winner since the price did not change significantly during the session. Also, if there was no candlestick body and only a flat line with shadows on the top and bottom of the straight line, this is called a doji. In some cases the doji appears when a change of trend is about to take place with the stock. The flat horizontal line with no candlestick body represents the struggle that took place during the trading session. The shadows on the top and bottom of the horizontal line represent the high and low during the session. When the doji appears, the following trading session may show that the stock is reversing direction and going the opposite direction of the trend in previous sessions.

Learning to read and understand candlestick charts can unlock a wealth of information about stocks, revealing their past history and what they may do in the future. Reading a candlestick chart is akin to a commander of an army receiving reports from the front lines of a battle, showing the daily struggle between his army and the opposing army. On days when the candlestick is long and white, the buyers reigned supreme. On days when the candlestick is long and red, the sellers won the day. On days when the candlestick is short or non-existent, the battle was a draw with no clear winner.

Candlesticks and their patterns are powerful indicators that can help a trader decide entry and exit points when trading stocks. They can also help in removing the emotion when trading. Emotion tends to remove rational thought and usually causes the trader to make unwise decisions that create losses. Candlestick charting is a tool that every stock trader and investor should have in their arsenal.