0

I've spent the entire day trying to learn how to read stock index charts, and as much as I read, I can't understand the concept of candlestick shadows.

According to everything I read, the upper and lower shadows represent the high and low, respectively. But what high and low? High and low prices? So, if the upper or lower shadow is very long, what does that mean? The high was very high or the low was very low? A lot of people paid high or low? See, I have no idea what it means.

And how does that differ from the length of the body of the candlestick?

And... or... doesn't the closing already indicate the lowest price in a solid candlestick, or the highest price in a hollow candlestick? I am very confused.

I just can't find a good explanation that really makes sense. All of them seem to address people who already know it.

2

Each candlestick in a candlestick chart represents the open, close, high and low for a period of time. If you are looking at a daily chart it represents the open price, close price, high price and low price for that day. If you are looking at an hourly chart, then a single candlestick represents the open, close, high and low prices for an hour. If looking at a weekly chart, then a single candlestick will represent the opening price on Monday morning, the closing price on Friday afternoon, and the highest and lowest price for that week.

The diagram below represents the two main types of candle sticks.

enter image description here

When the price closes higher than they open for the period of the candlestick it is called a bullish candle and the main body is usually represented in green. When the price closes lower than they open for the period of the candlestick it is called a bearish candle and the main body is usually represented in red.

In a bullish candle with a large real body and small shadows or wicks, where prices open near the low of the period and close near the top of the period, it represents a very bullish period (especially if volume is high). An example of this situation could be when good news is released to the market and most market participants want to buy the shares driving prices higher during the period.

An example of a bullish candle with a small real body and a large upper shadow or wick could be when market participants start buying early during the period, then some negative news comes out or prices reach a major resistance level, then prices drop from their highs but still close higher than the open. The large upper shadow represents some indecision in prices moving higher.

In a bearish candle with a large real body and small shadows or wicks, where prices open near the high of the period and close near the low of the period, it represents a very bearish period (especially if volume is high). An example of this situation could be when bad news is released to the market and most market participants want to sell the shares driving prices lower during the period.

An example of a bearish candle with a small real body and a large lower shadow or wick could be when market participants start selling early during the period, then some positive news comes out or prices reach a major support level, then prices move up from their lows but still close lower than the open. The large lower shadow represents some indecision in prices moving lower.

These are just some examples of what can be derived from looking at candlestick charts. There are plenty more and too much to include in this answer.

Another type of candle is the Doji, represented in the diagram below.

enter image description here

The Doji Candle represents indecision in the market. Prices open then move up to the high of the period then start falling past the open before reversing again and closing either at the open or very close to the open. The market participants can't decide whether the price should move up or down, so prices end up closing very close to where they opened.

A doji Candle close to a market high or low could represent a turning point in the short term trend and could mean that over the next period or two prices could reverse and go in the opposite direction.

There are many more definitions for candlestick charts, and I would recommend an introductory book on candlestick charting, like one from the "Dummies" series.

The main things to keep in mind as a beginner it that a strong bullish candle with small shadows and large real body could represent further price movement upwards, a strong bearish candle with small shadows and large real body could represent further movement downwards, and any candle with large shadows could represent indecision and a reversal from the direction of the large shadow.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy