Stock charts can be an overwhelming element of investing but that is only because of the amount of valuable information they are giving investors at any given time. Here, M.I.N. will describe the basic elements of candlestick charts and how to read them. The first thing young investors must understand about candlestick charts is the data set that candlesticks represent. The elements of each candlestick are the open, high, low, and close of an individual stock. The hollow or filled portion makes up the body of the candlestick coupled with the long thin lines above or below the body which are referred to as shadows.
When candlestick charts show progression or stock growth, the hollow, green candlestick will be drawn with the bottom of the body representing the opening price and the top of the body representing the closing price. On the flip side, if a stock loses value across a trading day, the red, filled candlestick is charted with the top of the candle representing the opening price and the bottom representing the closing price. Many traders are preferential to candlestick charts because they depict more information in an easier to decipher way. One special element of these charts are lengths of candlestick bodies.
Bodies of candlestick charts help show investors buying or selling pressures on a stock. Long, green, hollow candlesticks show strong buying pressure. The longer this candlestick gets, the more the stock price will grow from the open. These long bodies are indicative of bullish support or turnarounds from previous declines.
Long, red, filled candlesticks show strong selling pressure. Unlike long hollow bodies, long solid, red bodies are indicative of selling pressure. This is representative of a position closing at a lower price than it was when the market opened. After periods of stock growth, long red candlesticks can indicate a reversal marking the start of a bearish trend.
Short Bodies & Shadows
Generally speaking, short bodies are less representative of major trends or pressures but they do indicate low price fluctuation over time. Short bodies are also beneficial for charting price consolidation over time.
The lines above and below candlesticks are known as shadows. Shadows above bodies indicate session highs whereas shadows below indicate session lows. Candles with short shadows indicate that most trading is confined within normal market hours whereas longer shadows can indicate premarket and post market trading.
Long shadows above bodies are indicative of a buyer dominated session along with higher bid prices but, at the end of the session selloffs forced prices down from highs. This selloff action causes a shadow instead of a body. Long lower shadows indicate opposite of upper shadows where there are session sell offs that are forced back up by buyer pressure.