Bulls Battle Bears

Last week I spoke heavily on various indicators that many investors utilize for investment strategies but failed to mention one key chart reader. A few did email me asking why I didn’t talk about it and simply put, I wanted to focus on this method as one whole write up.

The method I want to talk about today is: Candlestick Chart note, this will be fairly long write up, so I will put out half today and the last part next week.

Lets begin:

Many investors to this day utilize this fundamental stock reading method that was started in Japan by a rice trader hundreds of years ago. The chart gives an overview of open, high, low, and close market prices over a certain period. This style highly popular because of its level of simplicity in reading and understanding the graphs. By looking at patterns on the charts, people have been able to look at future prices and directions with better accuracy than just randomly selecting stocks and their prices.

Layout:

The formation of a candlestick is very simple, you must have a data set that contains open, high, low and close prices for each time frame you want to show. The black or white portion of the candlestick is called “the body”. The long thin lines above and below the body indicate the high and low range and are called “wicks” and “tails”. The wick illustrates the highest and lowest traded prices of a stock during the time period being looked at. If the stock closed higher than it opened, the body is white, with the opening price at the bottom of the body and the closing price at the top. If the stock closed lower than it opened, the body is black, with the opening price at the top and the closing price at the bottom. Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure

Without much calculations like other charts, a candlestick is good for traders in the sense that the illustration of the image on paper can give away lots of clues and details of a stock. This enables a person to pull out data on the fly rather than punching in numbers that I know many of you hate.

Hopefully you can see that the length of the candlesticks are not always the same. This is due to the fact that the longer the body the more heavy the buying or selling is. The opposite takes place on short candlesticks where there is minor price changes.

Long white candlesticks show strong buying pressure. The longer, the further the close is above the open. This means that prices advanced significantly from open to close and buyers were aggressive. While long white candlesticks are generally bullish, much depends on their position within the broader technical picture. After extended declines, long white candlesticks can mark a potential turning point or support level. If buying gets too aggressive after a long advance, it can lead to excessive bullishness.

Long black candlesticks show strong selling pressure. The longer, the further the close is below the open. This indicates that prices declined significantly from the open and sellers were aggressive. After a long advance, a long black candlestick can begin to point towards a turning point or mark a future resistance level. After a long decline a long black candlestick can indicate panic or capitulation. This can be seen in many charts at present on the stock market – especially financial stocks!

This above image is actually the reason for my website name. The chart pattern is known as “Bulls Versus Bears” on the markets and its read as follows:

1. Long white candlesticks indicate that the Bulls controlled the trading for most of the day.
2. Long black candlesticks indicate that the Bears controlled the trading for most of the day.
3. Small candlesticks indicate that neither side could control the market and prices finished about where they started.
4. A long lower shadow indicates that the Bears controlled the market for part of the day, but lost control by the end and the Bulls made an major comeback.
5. A long upper shadow indicates that the Bulls controlled the market for part of the day, but lost control by the end and the Bears made an major comeback.
6. A long upper and lower shadow indicates that the both the Bears and the Bulls had their moments during the day, but neither could put the other away, resulting in a standoff.

These are the 6 major movements that you see on the chart and can utilize them to read a candlestick chart.

Remember, candlesticks are NOT perfect. One major flaw is that they dont show volatility on a daily basis. For instance, a stock might have hit its high and low prices many times in a single day, but on the candlestick, you will only see one record to analyze. This can hurt as if you look at daily swings on bank stocks lately, you may not be able to see the volatility clearly on a candlestick chart.

Okay, I will pause here as there is almost 4 pages of notes that I can write out but am sure that would not be simplified. Like I said before, small pieces of information will help better than one long writeup.

I will continue next week and if there are any questions, please email or comment and I will help out as best as I can.

Happy Investing!

Aman, MBA

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Related posts:

1. Simplified Sunday #6 – How to start off investing – Part 6
2. Simplified Sunday #3 – How to start off investing – Part 3
3. Simplified Sunday #4 – How to start off investing – Part 4