What are candle sticks? How do you interpret them?

To know about candle sticks, you must first learn that price moves with time. The price of any stock moves in time. You have time on one axis and price on the other. Usually, price is kept on the Y axis and time on the X axis. 

Four components can happen in a time frame:

The point at which the price opens in that interval is called the Open. 

The end of the price at which the price closes or the Close. 

The highest price point moved in that time interval is called the High.

The lowest price point moved in that time interval is called the Low.

To visualize these four points, O(Open), H(High), L(Low), and C(Close), Japanese candle sticks were invented.

The primary image of a candle sticks chart looks like the one illustrated below:

There are two types of candles based on colour:

1. Green Candles or Bullish Candles: These refer to the period the price moved above the opening price of the interval. A green candle signifies movement higher in price, often referred to as the bullish movement in the cost of the script.

2. Red Candles or Bearish Candles: These refer to the period the price moved below or in the negative direction based on the open price of the interval. This becomes a red candle on the chart, referred to as the bearish movement in the cost of the script.

(Note: Bull and Bear are often terminologies based on the attack pattern of the animals bull and bear. A bull hits from the lowest point to a point higher in the air. A bear hits his enemies or prey down into the ground. These are related to the price movement in the market. An upside movement is Bullish, and the downside is Bearish.)

Let us learn about these individual candles first, and in a later post, we will learn the interpretation of a chart.

A Green Candle:

Here in this candle, we see that price opened below the closing point. That is price moved upwards to the end highest on the wick and later closed below the highest point on the Close point. Since the close point is above the open threshold, we see the candle is green in colour.

There are upper and lower wicks of the candle; these are lines on the candle below open and above close on a green candle.

These wicks also have significance when we see candle stick patterns on charts.

These patterns are formed when we see multiple candle sticks at once.

A Red Candle:

Here a red candle is formed when the price moves below the opening price, and wicks are created when the price moves at the highest and lowest points, but the closing comes below the high and open price points. A lower wick signifies the price was forced below the closing point for some time but recovered until the candle was closed.

These candles can form in reality if you open a live trading view chart on the trading view platform. A historical price movement of the stock can also be seen, which shows how the price moved through the past period. You can also change the analysis interval on the trading view charts; more on this in the later posts.

These candle sticks often form patterns which are of many types. Single candles often tell a lot about the psychology prevailing in the market. More on single-candle interpretations in the next post.

Please do follow the blog for more such learning of the Markets.

Ankush