Why are candlesticks important?

In the daily epic struggle between buyers and sellers, technical analysis shows who is winning. If buyers are in control then prices go up, if sellers are in control then prices go down.

Everyday a battle is played out between buyers and sellers. Buyers drive up the prices and sellers drive down the price. A perfect example of this is at the seafood markets. Normally prawns sell for around $25 per kilo. At Christmas time, prawns sell for about double, at around $50 per kilo. Why the big difference?

In any market, buyers drive up the price and sellers drive down the price. At Christmas time because there is a large number of buyers, they drive up the price. It's the same as in the sharemarket- buyers drive up share prices and sellers drive them down. Candlesticks is a way of looking at the battle between buyers and sellers to see whether share prices are being driven up or down.

Candlesticks are a short term trading tool which is usually used to try and figure out whether buyers or sellers have the power in the short term (5-7 days)

A candlestick needs four pieces of information: the opening price and closing price and then the highest and the lowest price reached for the period.

The rectangle part of the candlestick is called the body and represents the difference between the opening and closing price. If the opening price is lower than the closing price than the body is white or green. If the opening prices is higher than the closing price than the body is black or red.

The long lines above and below the body represents the trading range. The top of the line is the highest price traded for the period. The bottom of the line is the lowest price traded.

If buyers are in control then the share prices usually goes up. If sellers are in control then the share price usually goes down.

They say a rising tide lifts all ships and so can a bull market. Technical Analysis or charting can help determine if we are in a rising market or a falling one. After all, around 3 out of 4 stocks follow the general market direction.

In this first bar, you can see that the price opened near the low and then ended near the high so the buyers were in control. Its body is white or green. It's quite a bullish signal going into the next day of trading with trading likely to start with the buyers in control and prices moving up.

Conversely, if the day's trading starts near the top and ends near the bottom, it means that the sellers are in control, driving the share price downwards. The body of the candlestick is black or red. It's a bearish signal indicating that sellers are in control and the next day of trading is likely to start with sellers in control and prices moving down.

The middle ground is balance, where no one wins the battle. Usually this signals consolidation and then potentially a change in direction.

It's all about the body

The body can let us about the strength of the move. The longer the body then the stronger and more intense the move was. A long white or green body signals strong buying power which will most likely see the price continue to move upwards. A long black or red body signals strong selling power with price most likely moving downwards.

Short bodies on the other hand, signal balance in the buyers and sellers. This signals low volatility which means that the price may be looking to break out.

Buy signals

Long Lower Shadow - the lower line must be the same or bigger than the body. The longer the lower line then the more reliable the signal.

Marubozu White - usually a signal that shows a continuation of an uptrend

Long upper shadow - the upper line must be the same or bigger than the body size. In fact the longer the upper line then the more reliable the signal.

Marubozu Black - usually a signal that shows a continuation of a downtrend.

There are many, many patterns of candlesticks which can give us insight into where price may be headed. I hope that this introduction has sparked enough interest to continue on and learn about candlestick patterns.

About Julia Lee

Julia Lee is the Head of Fundamental Analysis for Hubb Financial Group. She regularly provides financial commentary to SKY News and ABC Lateline Business. Julia is a frequent guest speaker at ASX Investor Hour, Australian Shareholders Association and investment conferences. For more information about Hubb Financial Group, please visit the Hubb website.

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