Candlestick charts were originally developed centuries ago by a rice trader in Japan. They have become one of the most popular methods of charting market movements in day trading. Many day traders believe that they can predict stock price changes by watching for certain patterns in the candlestick charts.
Understand the parts of a candle.The part that is filled in is called the body. It starts at the opening price and ends at the closing price.The thin line under the body is called the tail. It ends at the lowest price of the stock for the day.The thin line above the body is called the shadow. It ends at the highest price of the stock for the day.
Determine the time frame of the chart. Each candle on the chart represents a specific period of time. The time frame may be anywhere from two minutes to several months or years. The bottom of the chart will be labeled with time increments.
Determine if the stock price went up or down during the trading period.The color of the candle tells you whether the stock closed higher or lower than it opened. Red or white means that the stock price went down. Blue, green or black means that the stock price went up. Most charting software will let you pick the colors that you want.
Find the open and close of trading for the day. If the candle is red or white, the open is at the top of the candle and the close is at the bottom. If the candle is blue, green or black, the open is at the bottom of the candle and the close is at the top.
Determine the range of trading for the day. Look at the length of the entire candle from tail to shadow. A long candle means that prices varied widely over the course of the day. A short candle means that the stock traded within a narrow price range during the day.
Interpret the length of the body. If the body is long, it means that the price made a big change during the day. If it is short, it means that the closing price for the stock was very close to the opening price.
Interpret the length of the tail and shadow. A long tail means that prices dipped low but came back up before the close of trading. A long shadow means that prices soared but came back down before the close of trading.
Put it all together. For example, a short red candle with a long tail means that prices fell over the course of the day but closed near the opening price.
Learn to recognize basic patterns in candlestick charts.
Watch for candles with short bodies and long tails or wicks. They often signal reversals in stock trends.
Most charting software lets you choose "Candlestick Charts" as an option.
Remember that candlestick patterns can be interpreted many ways. Always wait for confirmation of a pattern before investing.
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