3. Candlestick Charts

Open, High, Low and Close

Each marking on a candlestick (as displayed in the above image) represents either the opening price, the closing price, the high price, or the low price. On their own, those words make a lot of sense: you can figure out what the “high price” means, but their meanings can get a bit confusing when it comes to candlestick charting. 

What comes into your head when I say the phrase “closing price?” I bet you think of the stock market close at 4PM. And you’re right, that is the close of the day. On a daily candlestick chart, in which each candle represents one trading day of price action, the candlestick close is equal to the last price traded on the day. 

But, what if we switch to a 5-minute chart, where a new candle is created every 5 minutes? Sure, the market still closes each day at 4PM, but on a given day, there are 78 five-minute candlesticks. 

Here’s a 5-minute chart for the entire day’s price action on April 22, 2020:

There’s roughly 78 candlesticks in that chart, and each candlestick has it’s own unique Open, High, Low, and Close. So every five minutes, there’s a new “five minute high,” or “five minute close.”

These values are arbitrary, and don’t have inherent meaning the way the actual open of the stock market at 9:30AM EST does. However, many traders use these arbitrary values to create trading strategies.

Now that you have a basic understanding of how to read a candlestick chart, let’s talk about how to read the price behavior, otherwise known as “price action.”

Leave a Reply

Your email address will not be published. Required fields are marked *