Unmasking The VooDoo: Candlesticks

Anyone who is not familiar with technical analysis and charting might think – quite correctly – that technicians like three things – 1) the markets 2) jargon and 3) naming things after themselves. I cannot argue with any of that although I would add that there is a bit more to the naming thing. Technicians like to give things quite obvious names.

A triangle pattern looks like a triangle. A rectangle looks like a rectangle. And a head-and-shoulders looks like the Kilroy was here drawing from World War II.

kilroy was here

Even non-technicians are somewhat familiar with bar charts. They use four bits of data – the open, high, low and close – for whatever period they cover and convey that periods action in one quick glance. And when we string them together, we can get a sense of what happened in the market over time.

Enter candlestick charts, or just simple, candles. While they seem new to some, they actually predate bar charts by quite a margin. The good news is that they use the exact same data to draw each period and we can string them together to get a sense of what happened over time.

So, what’s the big deal about them? The answer is that they add a new dimension to the analysis making it easy to see what happened during any one period even faster. A red or black filled candle is generally bearish while a green or white filled candle is generally bullish.

Again, same information as bar charts so there is really no actual advantage other than speed so far. But that is a big advantage when scanning a chart by eye to look for patterns and conditions.

Now let’s quickly talk about the major differences.

Big Fat Candles

There are two big differences between candles and bars. The first is that the open and close are far more important for candles than the high and the low. There are more patterns that emerge in candles. And there are more meanings.

The second difference is that candles have width. That means you rally cannot cram to many candles on a chart as charting service software will have to decide what candles will stomp on their neighbors and necessarily reduce their visibility and usefulness.


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