Charting is used in stock trading as a quick way of analyzing the movement of a stock or an index and predicting future direction. Volume charts measure the demand for a stock during a trading day, showing how often the security changed hands. Candlestick charts capture the opening and closing prices, along with the highest and lowest prices of the day. Candle volume charts are a blend of these two approaches. They’re particularly useful in that they record all of this information in one easily interpreted reference.
Learn to read the candle volume chart. Each stock is represented by a rectangle, or candle, which spans the open and close prices of the stock. "Tails" and "wicks," or the vertical lines above and below the candle itself, show the daily high and low prices. Looking at the candlestick aspect first, tall candles indicate a wide variation in stock price during a trading day; short candles reveal a modest price differential. A candle with a dark body indicates a falling stock. A candle with a white or light-colored body is a rising stock. On a candle volume chart, the candles will also be different widths to incorporate the volume aspect. A wide candle indicates a high trading volume; a narrow candle means the stock was not in high demand.
Interpret the data. It is common to see wide candles if the stock is rising as traders buy into a desirable security. It’s more unusual to see a wide candle on a falling trend. This means that the market is turning sharply against the stock, accelerating its price fall. On the other hand, narrow candles are usual on a falling trend, but more unusual on a rising one. A narrow candle on a rising stock indicates that the rally for that particular security may not last.
Learn to spot trends. A wide but short candlestick on a candle volume chart could mean the market is uncertain about a particular stock. A wide and tall candle shows strong movement one way or the other. A steadily rising stock with moderate volumes could still be a good investment, but one that is trending upward too aggressively and at high volumes could be about to peak.
- Spread Betting: Candle Volume Charting
- RapidSP Trading Simulator: Candle Volume
- Northwestern University. "Financial Toolbox: Candlestick Chart," Accessed Nov. 24, 2019.
- Gunduz Caginalp and Henry Laurent. "The Predictive Power of Price Patterns," Pages 184-185. Applied Mathematical Finance, 1998.
- University of Pennsylvania. "Plot Candlestick Chart," Accessed Nov. 24, 2019.
- The Data Visualization Catalogue. "Candlestick Chart," Accessed Nov. 24, 2019.
- Grace College. "Identifying Market Trends: How to Read Candlestick Charts," Accessed Nov. 24, 2019.