Candlestick Basics

If your entire trading system is based off of just candlestick patterns, you are almost guaranteed to fail. 

Why is that?

Because everyone is looking at the same chart. If you analyze these “high probability” candlestick patterns like the “Three black crows,” or “Bullish engulfing” pattern, you’ll likely find that the odds of something happening is still about 50%. 

Candlesticks were invented centuries ago in Japan by a prodigy that traded rice futures. Futures, explained simply, is a contract between two parties to buy or sell a given asset at a certain price sometime in the future. Read more about that here. 

The candlestick has 4 things to remember.

Opening Price

Closing Price

High

Low

Candlesticks are basically a vertical box and whisker plot. Remember we learned about those in middle school? Yeah, me neither. Anyways, here’s a visual:

Image result for candlesticks stocks

Image source: http://trendystockcharts.com/

The last thing you need to know is that when a stock closes higher than the opening price, but is still down for the day, you get a hollow white candlestick outlined in red. If you are curious how this could happen, sometimes stocks gap down in the morning. This means that they open lower than the previous day’s closing price because of overnight news when the market was closed.

Also, if a stock closes lower than the opening price, but is still higher than the previous day’s closing price, this would be represented by a black candle that is completely filled in. 

JD candlestick blog.PNG

The black rectangle highlighted in the chart above contains both a white hollow candlestick, and a filled-in black candlestick. 

Conclusion: Candlesticks provide a good visual for looking at what price has done since it gives you information at a glance. You can easily see the high, low, opening, and closing price. However, candlesticks are almost completely useless by themselves. If anyone tells you otherwise, they will need statistics to back it up.