The first step of technical analysis is understanding how to read the chart. For most beginners, they are most familiar with the price charts below.
This is a great summary of how this stock (Google) performed over the last year. The charge shows you the closing price which is the price of the stock at the end of the trading day, and at a high level, shows you the trend of the stock.
From the chart below, you can easily tell that from January to May, the stock had risen by 30% then a significant drop around June. The trend continues to increase throughout the back half of 2019.
Candlesticks is a chart you can use to take your technical analysis to the next level.
Candlestick Charts Basics
A candlestick chart (also called Japanese candlestick chart) is a style of financial chart used to describe price movements of a security, derivative, or currency. Here’s an example of Google stocks in a candlestick chart for the last 3 months.
A daily candlestick takes the price and splits it into 4 components: the market’s open, high, low, and close price for the day.
- Open: The price of the stock at the start of the trading day
- High: The highest price the stock reached during the trading day
- Low: The lowest price the stock reached during the trading day
- Close: The price of the stock at the end of the trading day
When looking in the individual candle, this is how the 4 components are represented:
The “body” of the candlestick chart is between the open and close price:
- On the left, when the close price is higher than the open price, that mean the stock has increased in value in the trading day. The body of the rectangle is usually colored in green.
- When the opposite happens and the close price is lower than the open price, this means the stock has decreased in value in the trading day. The body of the rectangle is usually colored in red.
- Occasionally, you might see a cross where the close price is equal to the open price.
The length of the bars are great visual indicators on how much the price increased or dropped on a single day. By looking at the Google example above, you can easily see that on Aug 21, there was a significant drop in price, and it can signal that the stock is oversold and an indicator that it’s a good time to buy.
Basic Candlestick Patterns
Patterns are separated into bullish and bearish. Bullish patterns indicate that the price is likely to rise, while bearish patterns indicate that the price is likely to fall.
Candlesticks are created by up and down movements in the price. While these price movements sometimes appear random, at other times they form patterns that traders use for analysis or trading purposes. There are many candlestick patterns. Here’s a few to get you started.
A engulfing pattern develops when there has been an upward or downward trend, then there’s a small green or red body followed by a huge opposite reaction.
Bearish: In a bearish engulfing pattern, this may indicate that sellers have outnumbered buyers and the price could continue to decline.
Bullish: In a bearish engulfing pattern, this may indicate that buyers have outnumbered sellers and the price could continue to increase.
A harami is a small real body (green or red) or cross completely inside the previous day’s real body. The pattern shows indecision on the part of the buyers.
Bearish: If the price continues higher afterward, all may still be well with the uptrend, but a down candle following this pattern indicates a further slide.
Bullish: If the price continues lower afterward, it may continue a continual downward trend, but an up candle following this pattern indicates a transition to an uptrend.
There are a lot of advanced candle stick patterns that you can learn. We will cover them in a later advanced guide in the future.