Chart Basics 2 - Candlestick Chart

We will now review Candlestick Chart Basics. Again we will use AAPL, with a close date of OCT 11, 2007. Below is an example of a Bar Chart with Trend Lines. And a Candlestick Chart with the same data and Trend Lines. I do not have a position in AAPL.

Charts below are provided courtesy of Stockcharts.com.
Please visit their site for more chart information.
http://stockcharts.com/

Click on Bar Chart to enlarge

Click on Candlestick Chart to enlarge

Candlestick Charts display the same information as a Bar Chart but the information is easier to comprehend. The thick rectangle on the candle is the Body. If the Body is Red then the Open is higher than the Close. The Top of the rectangle is the Open. The Bottom of the rectangle is the Close. The lines above and below the Body are called Shadows. The Shadows indicate the high and the low for the day. We will keep things simple and just call the shadows tails. If a tail is on the bottom of the Body that depicts a Bullish action. The Stock was pushed to a low by the Bears, but the Bulls came into the stock and pushed the stock higher. Tails on Top of the Body is a bearish sign. Tails at the bottom of the Body is a Bullish sign. Tails on Top and the Bottom of the Body indicates the Bulls and Bears are at war. Long Candle Bodies indicate momentum. The momentum is confirmed by looking at Volume. On Oct 11: the candle body was large indicating force. The tail on top was smaller than the tail on bottom an indication that the Bulls won and were able to push the Bears back above the 10 MA. The volume was huge so this was a major battle.

We will now add the overlays to the Candlestick Chart. Bollinger Bands with a 20MA. A 10 MA. And a 50 MA. On OCT 11 : The High found resistance at the upper Bollinger Band, small tail on top of the Body. The Low found support at the 20 MA, the long tail at the bottom of the Body. AAPL Closed just above the 10 MA, the low of the rectangle body.

If you put the overlays on your charts you will get a feel for how a stock performs at each overlay. Does the stock fall and then bounce off of the 10 MA? Does it break though the Upper Bollinger Band and then fall back to the 10 MA? When a stock falls through support at the 10 MA does it find support at the 20 MA and then continue the upward trend?

We will review some of these concepts in the next session.

Some people think that Charts have no bearing on your investment results.
I use Fundamental and Technical Analysis for short term trades. But, I also utilize a map when I am in unfamiliar territory. Some would have you believe that learning how to read a map (chart) was a waste of time. I guess that would be true if you had a lifetime to wander around in the dark and hope you find your destination.

If you have a position in a stock and the market rises for the next 10 years then you will have a high probability of achieving a positive return on your investment. You can snooze like Rip Van Winkle and when you wake up from your sleep you may have huge gains if the market went up while you slept.

I personally use charts for entries and exits after I have researched a company and its sector. I place time limits on my trades. If the position does not move in my specified time frame then I will exit the position. Time is precious and I do not like to wait for a stock to perform. Some people are comfortable waiting a year or more for a move. I prefer to take swift profits and move on to the next trade.

What woks for me may not work for you!!! We all are different. I would rather have a map than rely on strangers for directions when I travel in a foreign territory.

We are all individuals that participate in the Market - Some play the news, some play the earnings reports, some play options, some use fundamentals, some use technical analysis. Some use a bit of each. You need to figure out what works for you!!!!

The market is an equalizer - no one is an expert!!!! If someone proclaims that they are an expert and they have never had a losing trade then just run from them..... everyone experiences a loss in the market. The trick is to figure out what works for you. Maximize your gains. Minimize your losses. Determine what you are willing to Risk in exchange for the potential Reward.

If you ask me how I did in the market today - I would probably tell you about my losses, not my gains. I have to review my losses to see where I went wrong. Sometimes it was not an error that you made - it was just the market.

Have a great day!

Jethro