How to Read a Candlestick Stock Chart

Although the increasing popularly of candlestick charting might lead you to think it’s something new and different, it was actually developed over 100 years ago in Japan by rice traders. Candlestick charts are an attractive alternative to poring over price-earnings ratios or trying to remember the difference between a stock’s beta and its alpha. They are based on an easy-to-interpret, visually-appealing series of graphics built around four simple pieces of information. This overview will give you a quick feel for what a candlestick stock chart is telling you, but if you want to learn more about this method, you’ll need to investigate further via the Resources section.

Things You'll Need

• Internet access
• Symbols for the stocks you’re tracking

Instructions

1. Memorize the four key pieces of information that each candlestick graphic is designed to provide: the opening stock price, the closing stock price, and the high and low prices for the day. Rather than graphing numbers, though, this method emphasizes the range between these paired price points and uses changes in the ranges to interpret market sentiment.

2. 

   Study the difference between the two most basic elements of a candlestick, the body and the shadows. The body, which shows up as a vertical rectangle, shows you the range between the closing price and the opening price (at the bottom). If it is filled with black (or red on some web sites), the close was lower than the open, so the top of the body indicates the open and the bottom marks the close. If the body is filled with white (or green on some sites) the close was higher than the open, so the top shows the closing point and the bottom is the open. The shadows are thin lines that extend above and below the body to show the range between the day’s high and low. Some sources call the shadows “tails” or “wicks.”

3. Consider how you’d use this approach to show a stock that opened and closed at the same price. You wouldn’t have a body because there’s no need to show a change. So there’s just a horizontal line instead. This is called a doji. When you see one after a series of standard candlesticks, it usually indicates a change in market sentiment. Dojis usually have shadows above and below the line to show the high and low. However, sometimes, a doji will have only a lower shadow and no top shadow. This tells you that the open, high, and closing prices were the same or very close, but that there was a significant low during the course of the trading day. Similarly, a doji may have an upper shadow but no lower shadow, which would indicate an open, close, and low at approximately the same level with a noteworthy high during the course of the day.

4. Now, absorb one last concept and you’ll be ready to look at a chart. If a doji indicates a stock that had virtually no change in the course of a day, how would you show a stock whose open and close had the same range as its high and low for the day? In this case there would be no shadow lines, just a body. This type of candlestick, which is called a marubozu, (literally, shaven or close-cropped head) completes the basic discussion of what a candlestick chart can show you. To go further, you’d need to learn the names and meanings of many variations and combinations that build on these concepts.

5. Put what you’ve learned so far into practice by looking at the candlestick chart for a stock you’re interested in. You won’t find one on your brokerage firm’s portfolio page, at least, not just yet , but there are a number of web sites where you can enter a stock symbol and see its candlestick chart. Each site has a slightly different approach, however. One may analyze the chart for you while indicating the degree of confidence it has in the analysis, while others may not provide analysis but give you more flexibility to look at candlestick trends over different time frames. Remember, since a candlestick shows the range rather than any specific numbers, you can use candlestick charting to review a stock’s trends over a week rather than a day. You can also go the opposite direction and look at the range of movement within an hour. See Resources to explore this system in more detail.

Tips & Warnings

• Be wary of sites that charge to show you a candlestick chart or promise that it can be your key to stock market success. Since this charting method can be viewed at no charge from many different sites, there’s no need to pay anything to see a specific stock’s chart. However, some sites charge fees for access to additional information, such as trend analysis and interpretation, and you may find this worth paying for.

• Some websites offer software you can use to create your own charts, which may be especially appealing to technically-oriented, do-it-yourself investors.

Resources

• This site shows candlestick charts for U.S. exchange-traded stock and provides detailed query/analysis capabilities for a monthly fee
• A site that includes candlestick charting along with many other charting services and provides broad market news coverage
• Provides an excellent explanation of candlestick charting and an extensive pattern dictionary