How Can An Ancient Charting Technique Help Modern Daytraders?
Candlestick Charts For Daytrading
by Jayanthi Gopalakrishnan
Using candlestick charts can help the daytrader observe critical factors by allowing us to see the forces of supply and demand at work.
Does this sound familiar? The price of a stock is moving up. Feeling the adrenaline course through your body, you click the buy button. You watch in horror as the market tumbles, taking the stock with it. After all is said and done, you end up with a huge loss. Frustrated, you wonder what went wrong.
FIGURE 1: UP AND DOWN CANDLESTICKS. Up candlesticks are formed when the close is higher than the open. These are usually seen displayed as white or green. Down candlesticks are formed when the close is lower than the open. The body of these candlesticks are usually seen as black or red.
The idea of daytrading tempts us all, considering how easy access is to high-speed Internet connections and direct-access brokers. However, there are substantial risks involved, and to protect yourself, you need to understand what is going on in the market. After trying various methods, I have discovered a simple one that works with a fairly high degree of profitability. It is based on candlestick chart formations and volume. Understanding the relationship between price and volume allowed me to understand the degree to which buyers and sellers control the market at any given time.
It should come as no surprise that the use of candlestick charts has long been a favorite among traders. Candlestick charts reveal a key variable critical to short-term trading -- whether the buyer or seller has control of the market. If you are not familiar with candlestick charting, be aware that there are many formations, each with a distinguishing nickname. When studying end-of-day charts, you can look up the various formations and try to determine what to expect next. However, when it comes to real-time charts, you don't usually have enough time. So what I do is watch the development of a candlestick bar, relate it to the previous one, and determine whether a strong bullish or bearish force exists. It all lies in the color and size of the body of the candlestick.
UNDERSTANDING CANDLESTICKS
There are two types of candlesticks. For simplicity's sake, I will refer to them as up and down. The difference between them can be seen in Figure 1. In an up candlestick, the close is higher than the open and the body is usually left uncolored. (In a colored chart, this candlestick is usually represented as a green body.) A down candlestick has a black or red body and represents a close that is lower than the open. Often, you will have wicks above and below the body, and these represent the high and low prices, respectively.
Excerpted from an article originally published in the November 2000 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.
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