What can the candles tell us?
The candlestick chart can tell us a lot about the health, mood and
sentiment of
the market.
The sample candlestick chart at right is a Daily chart of the XAO index
(All Ordinaries) in late October 1997 (a market correction).
Notice four long black candles indicating a savagely falling index
value, with a long lower tail on the last candle. These four black
candles represent a daily decrease in the index by about: 2%, 2%, 3%
and 7% respectively - a total decline of about 14% in 4 candles. These
candles show that sellers dominated the market in an almost
panic-stricken manner.
This large fall is followed by a tall white candle (a rare increase of
6%), and mostly increasing index values in the following few days.
The sequence of long black candles, followed by a tall white candle is
a candle bottom known as the Tower Bottom.
One key give-away for candle-watchers on this chart is the very long
lower tail on the lowest black candle, which suggests a "rejection of
lower prices", and shows that there were significant buyers in the
market.
Knowing how to read these simple candles can be so very useful in
gauging the mood and sentiment of the market.
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Sample candlestick chart
XAO index (All Ordinaries)
Late October 2007 - a market correction.
(see explanatory text at left)
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Why is this
useful?
Knowing how to interpret basic candlestick features and patterns can be
very useful in understanding the mood and sentiment of the market.
Candles tell us a whole lot more about the market than the simple line
chart can tell us.
They can help to identify likely turning points in a stock or in the
market index.
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A quick sample
The humble candlestick chart (like the sample at right) shows us the
range in price in each "period".
This sample chart is a Daily chart of BHP showing the six candles for
each of six trading days in August. Each candle shows us the range in
price in each day. The white candle on 20 August has a short lower tail
down to the Low price of the day, and a very tiny upper tail (or wick)
reaching up to the High of the day.
- On a Daily
price chart, the candle summarises the price action for the day.
- In general terms, the candle
summarises the price action in one "period".
- The "period" could be a
day on a
daily chart, or a week on a weekly chart, or a month on a
monthly chart, etc., etc.
In the sample chart at right, the two candles on 22nd and 25th are
shorter relative to the other
candles on the chart. This shows us a shorter range in prices from the
high
to the low for each day, when compared to the other days.
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Sample Daily chart of BHP
in October 2008
Click on the image for a
larger version in a new window.
(see explanatory text at left)
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Candlestick basics
On share price charts a
candlestick (or
just simply a candle) can comprise the following
elements:
- A Body:
- Which can be black or white
(or red or green).
- It can be very tall in size, or
it
can be short.
- In some cases, the candle body is
so short it
appears to have no body at all (eg. what we call a Doji pattern).
- An upper wick
- also called a tail
or shadow.
- A lower wick
- also called a tail
or shadow.
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White
candle (or
green)
- The body of the candle is white (or
green).
- The bottom of the body indicates
the Open price for the "period".
- The top of the body indicates the
Close price for the "period".
- The top of the upper wick indicates
the High price for the "period".
- The bottom of the lower wick
indicates the Low price for the "period".
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Black
candle (or red)
- The body of the candle is black (or
red).
- It is very similar to the white
candle except:
- The top of the body is the Open
price.
- The bottom of the body is the
Close price.
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Candle bodies, wicks, tails
When observing individual candles, it is important to realise that the
candle body, and the tails, are all optional. The key things to look
for include:
- Is there a body at all? If not, it
will be a Doji.
- Is there an upper wick?
- Is there a lower wick?
- If there is a wick, how long is it?
Note the three samples at right:
- A
long lower tail, suggests a rejection of lower prices.
- A
fairly normal candle (to see in a healthy rising trend) with an average
size body, and reasonably sized wicks.
- A
very tall bullish candle with no tails at all (this specific candle
shape is called a Marubozu).
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Doji candles
We mentioned Doji candles above. The diagram at right shows some
variations in the basic Doji candle shape.
These variations are mostly long or short upper and/or lower tails. |
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Multi-candle patterns
It is also very useful to observe 2 or 3 adjacent candles, as specific
combinations can give us more good clues about the mood of the market,
and the presence or absence of buyers and sellers.
Some candle patterns can also suggest a likely change in trend.
The two sample candle patterns at right are what we refer to as
2-candle patterns - there are also 3-candle and 4-candle patterns.
These two patterns are very bearish, and if seen in a rising trend,
suggest a possible abrupt change in trend to downward.
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One candle can summarise many
Note the following
regarding the sample price chart of BHP at right:
- This is actually a 1-minute line
chart with a single candle superimposed. They apply to intraday charts
also.
- The 1-minute line chart shows the
price action through the day. There were 9,958 trades during the day,
so the squiggly line on the chart is joining up 9,958 points. The price
Opened at $43.57 at 10am, then fell to a Low of $43.28 around
the middle of the day, then rose to a High of $43.68 late in
the day, then fell a little in the last few minutes to Close at $43.65.
- A single blue coloured candle is
superimposed on the chart, summarising the price action for the day -
so it is a daily candle.
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A 1-minute price chart of BHP for the 8-hour
period from 10am to 4pm on 15 January.
Click on the chart for a larger image
in a new window.
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More information
There are some free eBook (PDF) Articles on candles listed here.
Useful
Links
The following web sites have lots of free information about
candlestick charts and patterns.
History and more at Wikipedia
Bulkowski's Candlestick Patterns
My SMP (Stock Market Power)
Master the Markets - Japanese Candlesticks
Features
Sensible
Investing - Ask yourself if the advice you receive
seems sensible.
Funda-Technical
Analysis - A clever blend of Fundamental Analysis
to identify quality stocks for a watch list, and Technical Analysis to
time the purchase (and sale) of the stocks to minimise losses and
maximise profit and capital.
Contrarian Investing Redefined
- The old thinking about contrarian investing now ought to be
challenged, and somewhat clarified or redefined.
Whatever
you do,
beware of the sharks
in the ocean!
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