What is Candlestick Chart? How is it different from Line chart? Why do traders prefer candle stick chart?
It is very important to for a trader or a investor who is new to the stock market to be able to study or analyse a candlestick chart.
Candle Stick Chart is the most popular chart among traders and investors. Most of the people who are not from the stock market, they think that line chart is the best chart but line charts are just end result points of the price movement at a particular point in time.
Each candlestick in a chart represents a specific period of time it can be 1 minute, 5 minutes, 10 minutes, 1 week, 1 month. It depends on what time frame is the chart set on.
Before we start with candlestick chart lets start by understanding what is a candle?
There are two types of candles that represent two different things. There is the Bullish candle which indicates that the price has gone up bad there is the bearish candle which represents that the price of the security has gone down.
Candle are mainly of two colours that is green which indicated a bullish trend and there is the red candle which indicates a bearish trend.
However, there are other colour combinations too, like white and blue. But they are not so widely used in candlestick charts.
Now let’s dig a little dipper,
The body of a candle (green or red colour rectangle) shows us the actual price movement in that specific timeframe which the chart is set on.
If the candle is a red candle than it means that the opening price of the candle is the upper part and the closing price of the candle is the lower part.
For a green candle, the opening price of the candle is the lower part and the closing price of the candle is the upper part of the candle.
The length of the candle represents, how much the price of the security has actually moved in a green candle the price will move up and in a red candle, the price will move down.
Now the question is,
What is the line that comes out from a candle indicates?
The line is generally called a shadow or a tail, I call it a shadow.
The shadow indicates the fluctuation of the price within a particular time frame, which means that the extreme ends of the lines are the points up to which the price of the security has moved.
The difference between the body of the candle and the shadow is that the body shows the actual price movement and the shadow show the fluctuation or the volatility of the price within a particular time frame.
There is also another kind of candle called Doji candlestick.
Doji candlestick is a type of candle which forms when the trends are about to change and the trend is about to reverse its direction.
Note that the change in the trend doesn’t always happen but if you are trading it is safe to get out of the trade as it might start going against you.
How to identify a Doji candlestick?
The body of a Doji candle is generally very small, on the other hand, the shadows are comparatively very big.
Note – Only follow Doji candle in a 15 minutes (or more) chart. This type of candle are often formed in 5 minutes and 1 minute chart most of them are false signals.
In a chart, the candlestick looks something like this,
The first four are the doji candle gave the signal of a change in trend and all turned out to be true but the last doji candle gave a false signal and the trend did not change, but still if you ever see a doji candle in a chart which is set on 15 min or more make sure that you immediately exit the trade.
What is a line chart?
A line chart is the combination of end result points of the price of a stock at the last moment within a particular period of time.
A line chart is basically useless in terms of trading as is doesn’t give any kind of information about the price movement. This is the reason why traders and investors use candlestick chart.
Let’s analyse a candlestick chart.
So in this chart as you can see the candle stick chart is giving you more information than the line chart ( both are exactly the same chart). If you just see the line chart you will be unable to study any kind of movement of the security.
First the chart started with a uptrend and then a doji candle candle was formed and then the trend reversed. The second doji candle was a false signal.
Now I hope that you will be able to analyse a candle stick chart properly.