How to Chart Stock Movements with Candlestick Charts
Candlestick charts are one of the most popular ways to track stock movements on the stock exchange or Forex markets. Candlestick charts pack a lot of information into a simple symbol - the candlestick. Understanding the anatomy of a candlestick in a candlestick chart can make it easier to read how the market is trending, which allows you to make more informed decisions on trading stock and stock options. The easiest way to learn how a candlestick is built is to make a candlestick from the information in one day's trading.
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Instructions
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Choose a stock to chart. For this exercise, we're just going to make one candlestick, so you only need the closing information for one day's trading for one stock. The chart shows the historical price data for Satyam Computers for May 18, 2009. You'll need the opening price, closing price, high and low for the day.
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On a piece of graph paper, label the vertical axis with numbers from the lowest price of the day to the highest price of the day.
Ex. The stock we're charting hit a high of 2.20 and a low of 2.00, so the vertical is labeled along the vertical from 2.00 to 2.20.
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Determine whether the stock closed higher or lower than it opened. If the opening price is higher than the closing price, you'll use a red marker. If the opening price is lower than the closing price, you'll use a blue marker. If the stock opened and closed at the same price, you'll use a black marker. Using the right color marker, place a dot at the low price for the day.
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Place a second blue dot at the high price for the day. Connect the two dots with a thin line. This is the "wick" of the candle.
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Find the opening price for the day and mark a horizontal line across the wick at that point. Do the same with the closing price.
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Draw a thick blue line between the two horizontal marks to create the candle body. That's the complete candlestick.
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Take some time to get familiar with the anatomy of the candlestick you just drew. There's a lot more information in that little symbol than you think. The color tells you whether the stock traded up or down over the course of the day. The length of the entire candle from wick top to wick bottom tells you the entire range of trading for the day. The length of the body tells you how much the stock moved from the starting bell to the closing bell. The length of the wick on either end can suggest the tenor of the market trading. For instance, a long top wick on a short candle body suggests a bullish push that was rejected by traders, while a long top wick on a long candle body suggests that the market pushed back against a bullish rise but couldn't force prices back down to the opening price.
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Tips & Warnings
While a candlestick chart gives you a lot of information, it's not a complete picture. To get a clearer picture of a day's trading, break the day down into smaller time increments.
Remember that a single candlestick only tells part of the story. Be sure to interpret candlesticks in the context of a fuller chart.
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