In this multi-part series of blogs we will delve into the benefits of candlesticks, the essentials of candlesticks and why candlestick charting works. In Part 1 of What Is Candlestick Charting, we detailed the benefits of candlestick charts. In this blog we move onto the construction of the candlestick line. In an upcoming blog we will look at the doji, a key candlestick signal.
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CONSTRUCTING THE CANDLESTICK LINES
As a key aspect of the topic of What Is Candlestick Charting, we first need to detail the anatomy of the candlestick line. The broad part of the candlestick line is called the real body .The real body represents the range between the session’s open and close. If the close of the session is above the open then the real body is white. If the real body is black the close of the session is lower than the open. Depending on your charting platform, the real body may be other colors, for example green instead of white or red instead of black.
The thin lines above and below the real body are the shadows. These are the session’s price extremes. The shadow above the real body is called the upper shadow and the peak of the upper shadow is the high of the session. The shadow under the real body is the lower shadow and the bottom of the lower shadow is the session’s low.
Candle lines can be drawn for all time frames, from intraday to monthly charts. For example, a 60 minute candle line uses the open, high, low and close of that 60 minute period; for a daily chart it would be the open, high, low and close for the day. On a weekly chart the candle would be based on Monday’s open, the high and low of the week and Friday’s close.
Notice that the candles to the right have no real bodies. These are examples of doji (pronounced doe-gee). A doji is a candle in which the opening and close are the same.
While the candlestick line uses the same data as a bar chart, the color of the candlestick’s real body and the length of the candle lines real body and shadows convey an instant x-ray into whose winning the battle between the bulls and the bears. For instance, when the real body is black, that means the stock closed below its opening price. This gives you an instant picture of a positive or negative close. Those of us who stare at charts for hours at a time find candlesticks are not only easy on the eyes, they convey strong visual signals sometimes missed on bar charts.
For example, we can easily tell that a tall white candle means, that at that session, the bulls are in control. While a long black real body is relaying a weak session. A doji means that the market is in balance between the bulls and bears and as such is often a turning point in the market. Doji represent a market that is in balance between the forces of supply and demand. We will look more at the doji in the next series of blogs.
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