Have you ever heard of candlestick charts? These charts are very powerful and effective for displaying a lot of information quickly. All good charts make it easier to see and work with data and information because they put this information into a visual format.
Candlestick charts are among the most popular charts for professional traders. Many pros will tell you that these charts are, in fact, better than more traditional line charts and other more widely used charts.
As the name implies, these charts look like candlesticks. If you look at a candle stick chart, you will see a bunch of “candlesticks” plotted out as points going left to right across the chart itself.
If you feel intimidated by candlestick charts, don’t worry. They can be a bit difficult for newer investors simply because candlestick charts are used almost exclusively in the investing world. Most likely, you didn’t encounter these types of charts in your high school math classes.
When you get down to it, however, these charts aren’t any harder to read than a normal chart. They are just a bit different, and that means you have to read them a bit differently. Once you get a hang of it, however, you’ll be able to read these charts as easily as you can read any other type of chart.
How to Read Candlestick Charts
Wondering how to read candlestick charts? If you look at the chart you will see a small box that will be either black or white. Each box will represent a trading day. Above and below the box there should be a line. These lines are called the upper and lower shadows, respectively. The upper line refers to the highest price a stock rose to within a given trading day. The lower line shows the lowest price the stock dropped to.
If the box is black, it means that the stock lost value during trading. In contrast, if the box is white, it signifies that the stock gained value over the trading day. Thus, if you’re buying stocks, you want to see lots of white boxes. If the box is white, then the bottom line of the box shows the opening price and the top line shows the closing price. If the box is black, the top line is the opening price while the bottom line is the closing price.
Candlestick charting might sound a bit confusing at first. Don’t worry, once you practice reading the charts, they become very easy to read.
Why Candlestick Charts Are So Popular
Candlestick patterns can convey a lot of information in a short amount of time. By being color coded with black and white, you can quickly and easily see price trends. The tails that show how low and high stock prices got are great for showing price volatility.
A regular line graph wouldn’t be able to convey that much information so quickly. That’s why candlestick charts are so popular, they convey a lot of information in a short amount of time, making them highly effective for traders. For professional traders, time can literally equal money. Hence, the more information they can get in a given amount of time, the better.
For example, price volatility can be very important for traders. If you know how volatile prices are for a given stock, you’ll increase your chances of buying low and selling high.
Big swings in prices will also likely correlate to big events. These include earnings announcements, a sudden increase in sales or a hot new product launch, a security breach, or some other type of big development that can sway the feelings and emotions of investors.
It might sound hard to believe, but once you learn how to properly read candle stick charts you’ll be able to pick up a lot of this information just by quickly glancing at a chart. A normal line graph and other similar simple charts simply aren’t able to convey that much information so quickly. That’s why many professional and advanced personal investors prefer candlestick charts to other types of charts.
So make sure you start checking these charts, and other advanced types of data representation, out on a regular basis. Doing so will improve your trading success!