No, I haven’t gone mad, we really need to clear up that you understand what type of chart we use and why. Otherwise, what follows in the methods and tech-niques will simply be a waste of time.
First of all, you should know that charts are a plotted price timeline of how a given stock has performed, over a given period of time. Many charts that we see in the news and in the papers are simply shown as a single line. These are only good for the general public to see whether the price has gone up or down. We can’t do detailed analysis with that kind of data, only general trend spotting.
There are various types of detail that can be added to the basic chart. For instance, you will often have the volume of trading shown underneath the line chart, and this shows the level of interest of traders in the shares, which can be useful information to check on the validity of any price moves. Of course, if the price goes up quickly, you will see a lot of volume as more traders are buying. The opposite is also true; when the price drops sharply, there is a large volume because many people are selling.
Hold on now, I hear you say; when someone is buying, isn’t someone also selling? Now you’re thinking! Yes that’s true, and that’s why volume alone wouldn’t tell you whether the stock price is going up or down. However, if you see a large volume but the price doesn’t change much, that is a big clue that both buyers and sellers are happy with the level of the price, and you probably wouldn’t expect much price swing for trading in the next few days.
A more detailed type of chart is called the bar chart. The line chart is usually just the daily closing prices plotted and connected together. The bar chart has a vertical bar for each day, from the lowest to the highest price seen that day. The opening price is shown by a tick to the left, and the closing price with a tick to the right. Although this chart shows all the information that is included on a candlestick chart, it is not so easy to interpret, because you have to look for the ticks to understand where the prices are go-ing. Less than twenty years ago, this was the best that a trader had. No wonder it was considered a difficult occupation!
Therefore, we use a third type of price v. time chart, which is called a candlestick chart. This type of chart has been in existence for a very long time. They have been used in Japan for at least a thousand years, but only came to the West much more recently. What the Japanese started to do, which is one of the things they do best, is analyse and develop patterns that, although they sound mysterious and strange, do have more than a grain (excuse the slight pun) of truth in them.
Today, Japanese Candlestick charting is in common use, as it’s perhaps the most common analysis aid, showing the information much more effectively than the older bar charts. They were brought to the Western world by Steve Nison, in 1991, with his book Japanese Candlestick Charting Techniques. He is seen very much as the founder of the western interpretation of Japanese Candlesticks. In fact you can go on one of his courses; although you may also be interested in reading a testimonial you will see from a member who went on one of his courses, prior to taking Insights!
So what should you know?
Well first of all, you should be able to recognise that a candle gives us a great deal of information; open, high, low and the close price on the market for any stock for a period of time, often a day. The graphical representation can look very like a candle, hence the name. From the style of the candle in itself and also how it relates to those for previous and later time periods, we can read a great deal on how the market is reacting to trader market sentiment.
The next thing that you really, and I mean REALLY need to know, is how the candles are formed. If you have no idea of the following, then I really suggest you go back to the module training and cover the sections devoted to candlesticks.
Essentially, candles show the Open, High, Low and Close of the market. The high and low are shown by single lines, which create what is known as the wick or the shadow of the full body, or candle. The actual candle shape, the wax of the candle so to speak, is formed by the open and close of the market.
Candles can be drawn for any time frame, they don’t have to only show days, weeks or months. They can show any time frame that has an open, high, low, close, which means they can be used for different styles of trading.
You will find that if you use candles on very short time periods (less than 15 minutes or so) it can become a little frustrating and somewhat misleading. Granted they will show you the information, but trying to use candlestick analysis methods for any practical purpose will prove to be difficult if not impossible. This will depend on the quantity of trading, but you are starting to look at individual trades on this time level, rather than seeing a wider spread of opinion.
If you need to have a closer, more intraday view than 15 minutes, I’d look at using a simple tick view, which just plots the price, and use the candles for longer peri-ods. This way you can use the tick to quickly gauge where the price is going, and use the candles, 15 min, 1 hour and 1 day – time frames, all open at once for Intraday trading.
Now you’ve been reminded what a candle is. Well, I expect you knew anyway, but covering old ground just to make sure is not a bad thing. I won’t cover the analysis of candles in this section; I will leave that for later lessons. I want to make sure that we’re all on the same page, that we understand each other, and that you’re ready to move on to making more of your analysis and subsequently your trading.