In our fourth installment of our Stock Market Made Simple blog series, we are taking a closer look at the various aspects of an individual candle. Interesting enough, each candle’s body and wick length or lack of it, tells us a story. If we understand the story behind a candle’s assorted characteristics, then we can use the acquired information to make informed choices about the stock we are examining. So, let’s get started with our first example.
The size of a candle is a direct indicator of the buying or selling pressure during the time frame the candle represents. For example, if a green candle is long like in our example above, it means the buying pressure was very strong and forced the price of the stock higher and higher as there were more buyers than there were sellers. The opposite of a green candle is true as well; thus, if a red candle was long, it means the selling pressure was strong and forced the price of the stock well below the opening price. Regardless if the candle was green or red, a long candle means the buyers or sellers were vigorous in their position and strongly moved the price of the stock in a direction.
In contrast, a small candle represents a lack of buying or selling pressure. Like in our example above, if a green candle is short, it means the buying pressure of the stock was weak and failed to push the price of the stock up much higher than its open position. The stock still gained in value, but it was a weak move which lacked strong support. The reverse could be said of a short red candle as well; because the selling pressure of the stock was weak, and even though it closed lower than it opened, the sellers were uncertain of their position and the stock hardly moved.
Just as the body of a candlestick tells a story about the shift in the opening and closing price of a stock; so, does the wick or shadow of a candlestick. For example, if a candle has a long top wick like in the example above, we can tell there was a strong push in the price of the stock, but the push failed to continue, and the price dropped back down. In this case, the stock still closed for a net gain; however, the highs the stock achieved during the day failed to be sustainable. The opposite of this example is true as well in the case of a long lower wick or shadow on a candle, but unlike the example above, the buyers and sellers’ positions are reversed.
On the flip side, if a candle has a short top wick like in the example, we can tell there was a weak push in the price of the stock as the buyers and sellers failed to push the stock strongly in any clear direction. In this example, the stock still closed higher than it opened, but the struggle to make great gains failed to find momentum. Again, the inverse of this example is true as well as a small lower shadow or wick on a candlestick shows the price did drop below the day’s closing price, but the sellers were quick to push back.
In closing, everything on a candlestick chart tells a story, and once we learn to read the chart patterns, we can begin predicting what will happen next. Because if life is an indicator of anything, it is human behavior is predictable.