How to Read Candlestick Charts

The candlestick techniques were developed by the Japanese in 1700s. It was to gauge the market emotions (fear and greed) which often distorted the relationship between supply and demand for securities. However, the candle stick charts only reveal short-term. Therefore, they might not be helpful to long-term investors.

A candlestick chart is a combination of bars and lines. It captures the market’s open, close, high, and low for a specific trading day. The shaded area between the open and the close is defined as the body.  Different colors are used to differentiate the daily market movement. The white color indicates that the market opens low, but the market moves up and closes high. It is associated with bullish sentiment. Conversely, the black color implies the market opens high, but the market moves down and closes low. It is tagged as bearish tendency.

Basically, the body of a candlestick chart presents the range between the market open and the market close. It helps momentum traders to detect uptend, downtrend, or range-bound of the general market or specific security.

 

                                        Source: http://www.investopedia.com/articles/technical/02/121702.asp

The line chart shown in the candlestick chart displays the price range of the index or security (upper bound and lower bound).

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