How Candle Charts are Constructed

Welcome to stage 3. In the previous posts, we looked at the differences between line charts, and bar charts, and why the bar chart is advantageous. In this post, we will look at a form of charting that is, in my opinion, even better than a bar chart. This form of charting is know as Candlestick Charting. Candlestick charting, like the bar chart, displays open, high, low, and close, but does so in a much more colourful and easy to read way, as shown in the chart below.



In the above chart, each candle represents one day of price action. Each candle is made up of 3 sections: The real body, the upper shadow, and the lower shadow. The real body shows the analyst the relationship between this open and the close. If the price of a stock goes up, the real body will not filled in. If the price of the stock goes down, which means that the close is lower than the opening, the real body will be filled in. The candle will be filled in red if the stock goes down that day and closes lower than the previous days close. It will be filled in black if the price closes lower than the open, but still manages to close above the previous days close. The chart below will better illustrade this.



The advantage with this type of chart is that it is easier to read, and that there are many interestingly named formations that analysts look for. I believe that Candles are so important that I will create a page dedicated to explaining all the major formations and showing real life examples of them. In the meantime, I hope this gives you a basic understanding of candles.