For those who are new to the stock market and trying to learn technical analysis – charts can be very confusing.
Line chart, Bar Chart, Candlestick Chart – Which one do I use?
Okay, Candlestick Chart is the best. But again, it can be confusing.
There are so many candles on the chart and none of them look like real candles!
Try learning the candles and there are so many patterns with funny Japanese names – Marubozu, Doji, Harami etc.
How to understand all of them and also remember them when trading?
Well, let me make it very simple.
Forget everything you’ve learnt and just observe the candle.
All you have to see are two things:
- The colour of the candle.
- The size of the body of the candle and the wick (shadow).
A large green candle without any wick shows the buyers were in total control. It’s a bullish sign.
A large red candle shows the sellers were in control. It’s a bearish sign.
If there is a small wick at the top or bottom, they do not matter.
Think about it. What does a large wick mean?
It suggests the price has been rejected.
If the large wick is on the upper side, it means the higher price has been rejected. The buyers took the price up, but sellers were stronger and were able to bring the price down. This is a sign that the sellers have more control and the stock is showing bearish signs.
If the large wick is on the lower side, it means the lower prices were rejected. The sellers tried to take the price down, but buyers were stronger and were able to take the price up. This is a sign that the buyers managed to take control and the stock is showing bullish signs.
Simple, ain’t it?
That’s all there is to candles.
Some Important points:
- Size does matter. When the size of the candle body or the wick is small, it can be ignored as insignificant.
- When the size of the body or the wick is large, the larger sized should be given importance.
- When a stock is in a downtrend and suddenly a candle appears which has a large wick at the bottom and a small body at the top – it means the lower prices have been rejected and this downtrend could now change into an uptrend. The name given to this is ‘Hammer’.
Once you understand the logic behind the candle, the names are not important anymore. You can just look at the chart and understand exactly what is happening.
Practice reading the chart this way. Pick a few stocks and follow their charts everyday. With time and practice, you’ll be able to understand exactly what’s going on.