Lets first understand what is technical analysis.
Technical analysis is graphical representation of price movement & this price movement is done by the buyers & sellers in the market. All the price movements in the markets are collected & drawn on a paper hence we get a technical analysis chart & this process of collecting data of price movement & drawing process is done automatically by computer & we see the data drawn on our technical analysis softwares(learn – charting platforms i use).
While price keeps on moving up & down for the whole day, finally it gives us 4 most important data which we use for technical analysis further.
OPEN : The opening price of the day
CLOSE : The closing price for the day
HIGH : The highest point price reached for the day
LOW : The lowest point price reached for the day
So at the end of the day when market closed, we finally receive all these 4 data & can start drawing charts which will be known as DAILY CHARTS as we are drawing the chart based on a single day’s information we have.
Now lets assume , in a stock we got these 4 data in hand & we’ll have to draw these data on charts.Lets draw it step by step,Firstly here is the data to draw :
open=346 , close = 340 , high = 352, low = 332
Lets mark all the data level on a graph sheet like below :
Now, we’ll create a box with two data areas- “opening price & closing price”. When the opening price is higher than the closing price, the box color will be black & when the opening price is lesser than the closing price,the box color will be white. The reason of this color difference is that when market closes higher than the opening price,it shows rising demand in price which is a bullish signal & when market closes lower than the opening price,it shows falling demand in price which is a bearish signal.So just to mark the strength or weakness of the day, we mark the the opening & closing area with black or white color. This part of area ( between opening & closing ) is known as “BODY”. Look at the pic below:
After drawing the body on chart, we can now connect highest price area with opening price area with a straight line to mark the highest point where price reached during the day & the same way we can connect low price area with closing price area with a straight line to mark the low point where price reached during the day.Line marked with open & high is called “upper shadow” & Line marked with closing & low is called “lower shadow”.
Finally once we draw the 4 data on a chart, it will start looking like a CANDLE hence we call it CANDLESTICK charts. Look at a bullish & a bearish candle here below. NOTE : i am saying a candle bullish or bearish based on body colors or based on the difference between opening & closing price.High & low will remain same always in terms of color as it’s just a line we’ll draw each time to show the high & low point of the day.Check below :
Now it’s time to check this candles on real chart :
You can see the date of candles(marked as blue box) & above every date,there is a candle either white or black.So the candle is drawn with the day’s data of that date below in it(shown in blue box). At TOP, boxed with red, shows you candle’s data.As the last candle you can see is for 19.12.2014 & so this charting platform shows the latest candle’s data by default.Once you keep on moving cursor on different candles,price data will be shown differently as data for everyday is different from one another.
DIFFERENT SHAPES OF A CANDLE :
Below are some different shapes of candle you’ll find on charts. For explanation purpose,i’ll assume all these are daily candles here:
these candle got large body with small shadows in it. candle-1 shows bullish strength as price pushed up heavily & finally was able to hold all the gains & closed near to highest point of the day. candle-2 shows bearish strength as price pushed down heavily & finally was able to hold all the sell-off or losses & closed near to lowest point of the day.
These candles got small body with small shadows in it. These kind of candle does not hint any form of bullishness or bearishness presence in market as after moving up & down for the whole day it returns back almost from where it started the day.Due to small length of these candles, we can get a hint of not much volatility presence in market.
These candles got larger shadow in one side & a small shadow on other side.Candle-5 & 7 shows strong bullish formation as price got a longer lower shadow which means price recovered from all it’s losses after falling down & finally managed to close near high(pic-5) or on high level of the day(pic-7).Candle-6 & 8 shows strong bearish formation as price got a longer upper shadow which means price lost all it’s gain for the day after a big upmove & finally managed to close near day’s low(pic-6) or on lowest level of the day(pic-8).
In some candles we will not find both the shadows like picture 9 & 10 here.Pic-9 shows a powerful bullish candle as price started moving up from the moment of it’s opening & finally closed at the high price of the day and this shows how buyers are in control for the day!!
Pic-10 shows a powerful bearish candle as price started moving down from the moment of it’s opening & finally closed at the low price of the day and this shows how sellers are in control for the day!!
Candle-11 is having a small lower shadow making a small low for the day & started pushing up for rest of the day & price closed at the top finally showing bullish strength in it. Candle-12 has no lower shadow showing bullish strength again at the time of opening & kept moving up for the whole day with a close near to the high of the day.
So this is how each candle communicates with you regarding something in it as candles are formed with trader’s activity in the ongoing market.So once we start reading the candles behavior,we can understand the market also hence we can trade & profit from this informations from candles.
TIMEFRAMES OF A CANDLE :
There are different timeframes available to draw a candle on chart :
Yearly timeframe : drawn based on a yearly or 12-month’s open,high,low,close data
Monthly timeframe : drawn based on entire month’s open,high,low,close data
weekly timeframe : drawn based on entire week’s open,high,low,close data
Daily timeframe : drawn based on a day’s open,high,low,close data
Hourly timeframe : drawn based on an hour’s open,high,low,close data
30min timeframe : drawn based on 30 minute’s open,high,low.close data
……………. & it follows the same for 15min , 5min , 1min timeframe.
So candles on daily charts are formed after a day ends, candles on hourly charts forms after end of an hour, candles on weekly charts form after end of a week & likewise candles keeps on forming in other timeframes based on the timeframe you’re following.
Below are two charts i’ve shown, how the different timeframes look like on a chart:
Different people use different time-frames for their trading purpose.Higher time-frame chart signals produce better results than lower time-frames trade signals.Higher time-frame means daily,weekly,monthly,quarterly,yearly & lower time-frames mean hourly, 30min,15min,5min,1min charts.
When you trade based on higher time-frames, your trading style & way will be much more relaxed as you’ll have to see the chart at the end of market session only but if you are trading lower time-frames, in that case you’ll have to keep a track on the charts in every hour to every minute during market hours.
I,personally trade mostly higher time-frames & trade hourly charts from lower time-frames only – as my trading style suits this kind of time-frames & i do not like sitting in front of system & keep on staring it whole day.
Below is a quick video presentation where i explained how a candle is forming real-time & time-frame variations:
Once you are familiar with the outlook of charting , now your next move will be to know the price action momentum going on in it to find out trading signal.There are different sections in technical analysis i discussed in this blog, which i train & use in my personal trading.You must read the lessons with it’s sequence as i’ve set in FREE COURSE section so that you don’t loose the track & understand chart analysis properly.