Most people are familiar with the typical ‘close-only line chart’ when looking at charts. This type of chart plots the closing price for a stock and nothing more. A far more powerful and meaningful chart to look at is the candlestick chart, which is more widely used by technical analysts and traders.
Candlestick charts were actually originally used by Japanese rice farmers in the 1600’s to keep track of crop prices (which explains many of the Japanese inspired names for certain chart formations like the doji, doji star and harami – I’ll cover these in future posts).
I have highlighted four areas on the picture of the candlestick chart. Area number 1 is known as the upper shadow and it’s tip represents the highest price the stock reached on that day. Areas 2 and 3 can interchangeably be the opening price or the closing price for the day – which is which is determined by whether the stock closed higher on the day (in which case area 2 would be the closing price for that day, and area 3 would be the opening price), or lower on the day (area 2 would be the opening price and area 3 would be the closing price in this case). The simple way to tell this is by the colour of the real body (the thick rectangular area between areas 2 and 3). If it is white (or not filled in, or green) the stock closed up on the day. If it is black (or filled in, or red) the stock closed lower on the day. Finally, area 4 is know as the ‘lower shadow’ and represents the lowest price reached on the day.
In the figure shown, the first day saw the stock open at $50 and close higher at $55. But during the day, it reached an intraday high of $60 and an intraday low of $48.
On the second day, we know the stock closed lower since the real body is filled in. The stock opened at $55 (the previous day’s close) and ultimately closed the day lower at $50. Again, during the day the ride was a bit wilder as it reached as high as $60 and as low as $38.
Compare this to the traditional close-only line chart which would just be a straight line from $60 to $55 over these two trading days and you will see that the candlestick chart will show you much more information.