Candlestick Chart

Popularly used by Technical Analysts, a Candlestick Chart helps study price movements of a stock over time. Let's study the basics of this chart with an example.

What is a Candlestick Chart?

The use of these charts can be traced back to the 18th century in Japan. Japanese rice traders began using these charts to predict price movements. The charts were easy to understand and, in addition to the price movements over a period of time, they also captured the "intra-day" price fluctuation .... the price movements within the day.

Why the peculiar name? As you will see below, the chart resembles a candlestick — a long, slender holder — with a candle in it.

Chart Elements

Here is one version of a basic chart:

The chart is made up of the following elements:

• High: the highest price of the day.

• Low: the lowest price of the day.

• Open: the price at which the stock opened for the day.

• Close: the price at which the stock closed for the day.

• Upper Shadow: the difference between the high price and either the open or close price — whichever is higher.

• Lower Shadow: the difference between the open or close price — whichever is lower — and the low price.

• Real Body: the difference between the opening and closing stock price for the day.

As you can see, when the closing stock price is higher than the opening price, the Real Body is shaded. On the other hand, it's empty when the stock closes higher than it opens.

Take a look at another version of this chart — this time in color:

Here, red is used for days when the stock closes lower than it opens — equivalent to the shaded Real Body in the first version. Green is used when the stock closes higher than it opens — a hollow Real Body.

An Example

The chart above shows the price movement of General Electric (GE) over a one month period. You can see a summary of each day's price movement as well as its performance over the month.

Candlestick Trading Strategies

There are several trading strategies that are built around these charts. These technicals are, unfortunately, not covered here. However, for an excellent, easy to follow tutorial on these trading strategies, we recommend the Investopedia website.

In summary, we looked at what these charts mean and different versions of representing them. Our G.E. example showed us what they look like over a one month window. We now know the basics of candlestick charts and can easily read them.

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