• SumoMe

If you aren’t an investor, or let someone else handle your investments for you, chances are you don’t know what this is. If I saw this a couple years ago, I wouldn’t know either. It’s called a candlestick chart, and is one of the most widely-used types of charts for evaluating trends in investments. What is so useful about it is that you can tell what a stock did each day, rather than simply where the stock closed.

Only helpful for evaluating individual datum.

We’re all familiar with the line chart. You probably learned what this was before you were old enough to put your own pants on–and for good reason. It’s really easy.

Line charts show one type of data over time (in the case of stocks, it shows the close price). This is helpful only if you simply want to know the close price of something each day (which some people might want to know).

The problem with this chart is that you can’t see daily trends. You don’t know what happened on each point in the chart. This is why you should graduate to the candlestick charts.

Electrogent's graphic budget is on par with Star Wars.

I created this awesome MS paint example of some candlestick symbols. These are extremely easy to understand, and once you grasp them, you will not only get the same information as the line chart, but you will know an individual day’s information.

First of all, the symbol is either an empty box, or a filled-in box. Empty boxes mean the stock closed at a higher price than it opened, and a filled-in box means the stock closed at a lower price than it opened. It’s important to note that if you are watching a chart in real-time, the close portion of the box is the current (or last) price.

The line that runs vertically through the box shows the highest and lowest point the price reached that day.

Usually, the symbols are colored in green or red. Green means the close price was higher than the previous day’s, and red means it went down.

That’s it. Pretty easy, right? Candlestick charts gain their complexity when you look at all the sorts of patterns that people believe can forecast future behavior. For instance, if you don’t see a vertical line above an empty box, that means the close/current price is the high price–this indicates upwards momentum. If you see an empty box like the one pictured, you know that the close/current price came down off the high a bit. No line under a filled-in box means the close/current price is at a downwards momentum. If you see a really long line underneath, and almost no box (where it looks like a cross) you can see extreme upwards momentum because you know the current/close price is way up from the day’s low. The types of patterns that investors find can become increasingly complex, whereas intra-day patterns are more intuitive.

There’s no real need to become an expert in this. However, if you want to increase your knowledge about stock trends, you should start with understanding the candlestick chart because it will give you the same information as the line chart, but it will let you see daily momentum on each point.

Have any further questions about candlestick charts? Know more than I do about them and want to share your thoughts? Go nuts in the comments below.