A SHORT GUIDE TO INVESTING
Investors use many types of charts to analyze a stock. The three main types of charts are: line, bar, and candlestick charts. When choosing a chart, I personally (like many other investors) use candlestick charts due to the greater amount of information provided by them in comparison to the more simple line or bar charts. Though they may seem more difficult to read at first, candlestick charts are actually easy to read and interpret once you understand them. Candlestick charts might remind you of the box and whisker plots you've studied at school, but they obviously aren't the same.
This popular choice of chart, which is sometimes set default in several online websites, consists of a body (fat rectangular part of candle) and tails/wicks (the thin lines above or below the body). Every candlestick provides an open, high, low and close price for a time frame. The time frame of the chart is set by you. They are a good way to see the trend and price range of a stock during the chosen time frame, whilst signaling its volatility. So let's dig deeper into them!
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How to read a Candlestick chart:​
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The image on the right shows the basic design of an ordinary candlestick. There are three points that make up a candlestick: open, close, and its wicks. Firstly, what are the open and close prices? These points demonstrate the first and last price of a stock for a selected time period. The range in between these two points creates the body of a candle. The color of the body represents the trend of the stock's price for that candlestick. So, a red candlestick shows a downward trend (fall in stock price which is why its called bearish) and green shows the opposite. The price of the stock in comparison to the open price defines the color of the body, so a red candlestick means that the current price closed below the open price and green shows the opposite. Therefore, this can indicate the general trend of a stock for the selected time period.
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The other part of a candlestick, the wicks (also known as tail or shadow), show the extremities in the price during the chosen time frame. The wicks are the thin lines above and below the body of a candlestick. The top of the upper wick (high) shows the highest price traded during the candlestick. The bottom of the lower wick (low) shows the lowest price traded during the candlestick. If the open was the lowest price during the time frame, then there will be no lower wick. You can calculate the price range of a candlestick by subtracting the high from the low. A large range (meaning that the whole candlestick is long) indicates a lot of volatility, while a small range indicates a safer stock (less volatility).
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Please take a look at the second image found to the right to get a deeper understanding on what the shape of a candlestick may indicate. I also recommend that you practice reading candlestick charts as it is important that you understand them before skipping to investing strategies and so on!
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I hope that you now feel more comfortable about using candlestick charts, though of course you are not forced to use them when analyzing a stock. Remember, investing is not only about copying what other successful investors do. There are no specific instructions that must be followed in order to become a successful investor!
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Next: How to pick a good stock
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Figure made by Tradesciety