Best Explanation of Candlestick Charts Ever!


Are you brand new to trading and investing and you now find yourself getting acquainted with stock price charts, and you’re trying to understand what the heck all of these shapes really mean as they move up and down. What do they represent? Why are they drawn that way and how do they relate to me as I try to figure out how to trade? These shapes are referred to as candlesticks, but sometimes they’re also called price bars, or just simply: bars. And these form one of the most basic building blocks upon which we use to look at and evaluate the moving price of a stock or some other market. And they pack lots of valuable information into each one, at the same time they paint a picture about the psychology of what’s happening with a stock’s price as it moves throughout the day. So how do these candlesticks do all of that? Stick around and watch this short video as I offer the best explanation of candlestick charts ever! I’ll explain what candles are and we’ll animate how they’re formed and we’ll talk about why they’re so valuable to us when it comes to reading a price chart. So hang on and we’ll break this down together coming right up! [Music] Hey everyone! This is Dan here from the Joyful Trader channel where I’m always encouraging you to learn how to take control of your own investments by learning how to trade. And even if you’re totally brand new to investing or trading, you’re always just the right age to start learning, young or old. So, in this channel we talk about all kinds of information for beginners who are learning more about the very basics of trading and investing, but we also talk about ways to improve our life and our happiness by fostering a joyful attitude because we know that money can’t buy happiness, but we should nurture and prioritize happiness while we build wealth at the same time. We always keep it positive upbeat and easy to understand, so if you’re new here you’ll want to become part of our growing community of helpful traders and investors, and you can do this by easily clicking that SUBSCRIBE button below and then hit the LIKE button if you’ve learned something useful today from this video. And as always you can catch me over here on social media, so check in and say hi. Alright, so get ready for the best explanation of candlestick charts ever! If you’re brand new to looking at stock charts then all of these lines and shapes can seem a bit overwhelming like something that only a highly trained mathematician can interpret, but fear not, that’s not the case and they’re really easy to make sense of once you know what you’re looking at. And don’t feel bad about not knowing what they are. It’s just a matter of learning how these bars and shapes are formed and what they represent, and once you know it it’ll become super easy for you to glance at a chart and quickly make sense of it. You’re probably familiar with seeing charts that look like these, and you can tell that the shapes somehow represent that the stock price is moving up and down in some fashion, but let’s strip it down so that we’re looking only at a chart that contains candlesticks. And from the look of them you can probably tell why they’re called candles, since they have what appear to be wicks and a candle body, but these simple shapes contain a lot of price information inside of them which we can interpret pretty quickly because of their shape and color. Reducing all kinds of complex financial data down into simple shapes and colors is really the best way for allowing us to quickly make decisions, and size up what’s going on with the markets just at a glance. It shouldn’t be a surprise that our brains can interpret visual data in the form of shapes and colors so much faster than by just looking at the written word alone. I mean look at the following shape and color, and you tell me the first thing that pops into your mind when it flashes… Ready? 1, 2, 3. I’m willing to bet that most
of you, at least in the United States, immediately recognize that the octagonal shape combined with the color red indicates a stop sign. And that sign triggers all kinds of other thought processes when you see it about how to handle your car, and being aware of other streets and dangers nearby. Our brains just click right in and flash gobs of information that all get triggered just from seeing that simple shape. Well, organizing price movement this way really makes processing complex stock data pretty easy when it can be translated into a series of simple shapes and lines and colors. And if you practice looking at it a little bit, you’ll discover that you’ll be able to look at 5 or 10 charts just at a glance, and then spot the ones that are doing something unique that you’re looking for. So the first thing to know about a candlestick is that it’s just a graphic representation summarizing the price movement that happens within a certain period of time. For example a candlestick can outline all of the price movement of a stock or other instrument that occurs within a single trading day, but it can also represent all of the price movement happening within a single hour, or a 30 minute period, or a 15 minute period, or even a 5 minute period. That period can actually be defined as any duration that you want within your own charting software. It could be one minute, four minutes or other interval, but those I mentioned first are fairly typical time intervals that many traders tend to look at when they’re trading. For me when I trade stocks or futures, I’m looking at a chart of a one-day interval, an hour interval, a 15 minute interval, and a 5 minute interval… all on one screen. A candlestick contains FOUR key pieces of information about how the price is moving within any of those times, and those pieces of information are the following: 1st, the starting price at the very beginning of the time interval, also called the OPENING PRICE. 2nd: the last price traded when the time interval is over, called the CLOSING PRICE. 3rd: the highest price point that occurred during the time interval simply called the HIGH, and 4th: the lowest price point that occurred during the time interval, simply called the LOW. You’ll frequently see these four items referred to as O H L C in many stock charts along with their corresponding values. And you can see an example of that over here. So let’s pick a time interval and take a look at how these four values actually create the candlestick shape as the price moves, and to make things easy to understand, I’m going to pick a time interval of one single trading day of the week. So here’s our week: Monday through Friday. And let’s use Wednesday as the day that our time interval is based on. During a typical trading day, the market is open for six and a half hours and so the bottom horizontal line on our Wednesday box will represent time from left to right such as 9:30 a.m. to 4:00 p.m. Eastern Time. And the left vertical line will represent the price increments like a typical graph from lowest to highest. So when the opening bell rings on Wednesday morning, the stock begins to trade at a certain price, and again this is referred to as the opening price. And we can see that our dashed line is representing that level. So as the trading day occurs we can see that our blue price line begins to move up and down as traders are buying and selling the stock. And as we reach the end of the trading day, the official closing bell rings, and the very last recorded trade of the day acts as our closing price. And again we can see that level being illustrated with the dashed line, so at this point if we just fill in the space between the opening price line and the closing price line this will form what we call the candle body, but keep in mind that these are only two out of the four pieces of information that we need in order the form of proper candle. The next one is the highest price that the stock traded that during the day, and we can see that level being drawn right here in the high. And then the last piece of data we need is the lowest price at which the stock traded during the day which is now being shown here at the low. So if we now draw a vertical line typically referred to as a wick out of the candle body up to the high of the day, and then down to the low of the day, we can see that we have a fully formed candle which contains all of the four elements of open, high, low, and close. Now just from glancing at the shape we can get a sense of how the price moved all day long for this stock we can see that after it opened the price went down below the opening price at some point, and then the high of the day moved above the price that it closed at. And it doesn’t necessarily tell us when those highs and lows took place during the day, but it lets us know what the range of the price movement is relative to where it opened and closed. And as you learn more, these shapes can be really helpful clues as to how a price may be getting ready to move in the near future. And another thing to know here is that I’ve colored the candle green. And this is because the closing price of the day was higher than the opening price, so the green color indicates that the price has moved up, and these upward moving candles are typically referred to as BULLISH candles. And even though your charting package can use any color you define, it’s fairly common that candles are colored green if they’re rising. Conversely if the closing price was lower than the opening price, that would mean that the stock price went down during that period and we would commonly see the candlestick colored red. And as such, those would typically be referred to as BEARISH candles. So you have this contrast between bullish and bearish candles. Now sometimes you may see these candles drawn in a few different ways. Although they still all contain the same open, high, low, and close information, here are the three most common forms that you may see candles appear when you’re looking at a stock chart. The one on the left is the one we just looked at. And remember since it’s green it indicates that the price was higher at the end of the period than it was at the start. The next candle here has an empty candle body, and is sometimes referred to as a balloon. So if you think of a balloon as something that rises up into the air, it will remind you that the price ended the day higher than it started. Tt’s just another way of displaying it. And sometimes these candles are just plain white or some other color, but because they’re balloons with a hollow body we can see them and we can know what it means, that the price was rising and therefore they’re bullish candles. However if the candle had no descriptive color to it, and the body was solid and filled, in we would interpret that as a bearish candle. I think of it as a lead balloon because the body is filled in solid, and what does lead do? It tends to fall to the ground, so therefore the price of the candle is moving downward. And yet, another common candle shape is this one which I’ve heard referred to sometimes as just a STICK, but like the others it still contains all of the same information without having a fatter candle body. You can see that opening price on the left, and the closing price on the right, are just little notches while the high and the low wicks still show the overall range of the price movement. These are typically colored green or red to make them a little easier to distinguish on a chart, but again they can be any color you like in your charting software. So now that you know how price candles are formed, and what they really mean, let’s test out a few and see if you can quickly identify what’s going on here. So if you saw this candle, what would you say is happening with the price? Right, this is a bearish candle because we know it’s red in color, plus the body is solid like a lead balloon. Because of that, we know that the closing price must be lower than the opening price, and so the stock price is going down during this period. How about this candle? what’s going on here? Yep, this is a bullish candle because even though the color isn’t green, it has a hollow candle body which tells us that it’s a balloon. Therefore, the closing price is higher than the opening price, and so the price is rising. But also look at those wicks… how long they are. We can tell that during this period the price really went high and then really went low before it ended up closing just a little bit higher than the opening price. These wicks tell us that there was a really big battle during this time between the Bears and the Bulls to try to take the price higher or lower. But in the end, it just closed slightly above where it opened so there was a lot of volatility here in this one. Okay, how about this one? Can you recognize what’s happening to the price during the day on this candle? We can see that there’s no candle body at all. And so this tells us that the closing price during this interval was the exact same as the opening price, so there wasn’t any movement in the price at all from the start to the end, except for the parts in between. We can see from the wicks that the price tried to move up a little bit, but the sellers really tried to move it down a lot. But in the end, the sellers couldn’t keep the price down as buyers came back into the market and pushed the price back so that it closed right where it opened. This is a special kind of candle that we call a DOJI. These candles are really interesting when they appear, because they can act as a warning that there could be an overall change in the direction that the price is moving. This can be particularly true after a steady rise or fall in price movement, and then we start seeing a Doji candle appear. It can imply that the price that was moving in one direction and is starting to lose momentum because buyers and sellers are becoming more even in their numbers. In other words, there aren’t a flood of buyers pushing a price up, or a flood of sellers pushing it back down. There’s a more even crowd in both directions. And the beauty of being able to understand the simple shape of a candle stick allows us to quickly glance at a chart and spot these potential turning points just by their shape. Here’s a daily chart to glance at fast. Are you able to spot the Doji candles in this chart? If each candle was literally written out as a chunk of numbers it would be nearly impossible to visualize the price action in any meaningful way. In fact when you look at a series of two, three, four or five candles next to each other, you can actually begin to identify patterns that many traders successfully use to decide when to trade the stock, and which direction the price is likely to go. I don’t have time to explain all of those patterns in this video but I’ll be making another video devoted to talking about all the most common candlestick patterns, and the ones that most traders like to use. The first step of course is to understand what we learned about in this video, which is what the shape of the candle represents, and how it gets its shape throughout the day. So keep in mind again that a candle represents the price movement within any length of time. In our example here we used a candle that represented a full day, but again, candles can represent one hour or just five minutes or less. The takeaway is that they all contain the same metric of information regardless of the timeframe that you use them for, and that is: Open, High, Low and Close. So I really hope that I’ve been able to help illustrate what candlesticks are. I mean to some this may seem like something so basic that it barely needs an explanation, but I made this video because I talk to people all the time who are very interested in learning how to trade, and although they may have seen these shapes before, they don’t really understand what they meant. So in order to enter the world of trading and investing, and to be competent, no matter your investment style, these are the essential building blocks that we all need to be familiar with going forward. By understanding candles now, try going back and looking at some charts, candle by candle, and you’ll see that they’ll begin to paint a picture of what’s happening with the stock’s price. You should be able to see price movement painted in a different light now since you know what it means. And candlesticks are really a reflection of the psychology of all the traders who are bullish and bearish, and the battle that they are engaging in to win control of the direction of the price. The candles are really showing us a picture of the fear and greed that are occurring within these two groups, and it’s really fascinating when you begin to look at them and see it that way. So now that you understand candles you’ll be able to learn about a myriad of candlestick patterns that can be used as a basis for making your trading decisions. Additionally, applying technical analysis indicators on top of these candles on our charts will give us new meaning and can help us to design simple trading strategies that we can use to build our own algorithmic trading systems. And that’s pretty cool stuff all starting from understanding simple candlesticks. OK, so here’s my Question Of The Day: Have you learned something new about candlesticks that you didn’t know before? Go ahead and type in a simple YES or NO answer, and answer down in the Comments section. And if you put a “NO”, tell us what part of this video you need me to explain better. There could be something important that I missed, and so I want to address that and make sure to help everyone out. And again that’s why this channel isn’t just about me, it’s about YOU: the Joyful Trader community helping each other out to learn how to be better traders, and to be better humans. So please share your comments below so we can all benefit from this huge collective pool of knowledge that we have. Coming up, I’ve got lots more videos we’re making about trading indicators, developing algorithms, how to use related software, as well as inspirational stuff that will help keep us motivated and grounded. And in fact, I put a lot of that on my social media channels so please follow me over there as well. So as another reminder, if you like watching our free trading related videos then please hit the SUBSCRIBE button and help us build our tribe. Give this video a LIKE if you learned at least one new thing, also by ringing the notification bell, you’ll get an alert that there’s something new and totally cool that we’ve just uploaded. And as always, this is Dan saying: Never. Stop. Learning. Stuff! And I’ll see you in the next video! [Music]

3 thoughts on “Best Explanation of Candlestick Charts Ever!”

  1. QUESTION OF THE DAY: Did you learn something new about candlesticks that didn't know before this video? YES or NO? If I missed something please let me know what it was so I can explain it a little better? Also, are you familiar with candlestick patterns and want to learn more about how to use them to trade? Let me know 🙂

  2. These are high quality videos! Keep up the great work! Came here from Quora. Thanks for the detailed answer of the gurus there.

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