Stock Pick 101: Candlesticks Versus Bars on Your Bar Chart

Douglas Newberry
 


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Are you still using bars on your price charts instead of candlesticks? If so, you need to change that bad habit right away. Candlestick charting was developed in Japan, and some people still consider it “foreign” because of this. While candlestick interpretation has its own colorful language and mythology, you don’t have to know anything about it in order to appreciate the visual advantage candlesticks offer.

A traditional non-candlestick bar shows the open and close as short horizontal ticks that are difficult for the eye to pick up. This makes getting a sense for price movement more difficult.

On the other hand, a candlestick shows a color-filled body between the open and the closing price. The color of the body easily communicates an up bar with a green body and a down bar with a red body. This is much easier to read than the bar chart. Thus, it makes it easier to get a sense of how a stock is moving.

The candlestick has a further advantage in that the body gives a visually useful reference point for interpreting the “wicks” that may be sticking out either end. This starts to get into the huge field of interpreting sequences of candlesticks.

The thing about candlestick interpretation is that it all has to be done in the context of other candlesticks. No candlestick should be interpreted in isolation.

Candlestick charting was popularized by Steve Nison, CMT. I once saw him in a lecture at a trading conference, and he explained that he actually had to pay for the translations of the “secret” Japanese book on trading with candlesticks.

Candlestick analysis can be combined with other analysis techniques such as moving averages, RSI, MACD, Bollinger Bands and whatever else you happen to be into. You’ll find yourself spotting market turns earlier if you combine your existing technique with candlestick analysis. Sometimes the candlesticks alone will give a unique and valuable perspective that you can’t get any other way.

Candlestick charting is a highly refined and developed art in Japan, and you can tap into this wealth of unique experience if you want to refine your market timing further. You may find that as a stock picker, your trade timing makes your stock picking, futures positioning or forex trading more accurate than ever.

Studying candlesticks can be quite rewarding and profitable in its own right. But like any endeavor, it takes awhile to get the hang of it. But even if you never start down that road, you’ll find that using candlesticks is easier on the eyes than using bar charts.

Doug Newberry is the Founder of Investing Systems Network. He builds financial software for stock picker investors of all kinds. Tens of thousands of investors in more than 23 countries enjoy his newsletter and weekly radio show.

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