In the world of charts, there are a handful of different options. Line, Bar, Area, and Candle are your most common. The Candle Chart is the most widely used by successful traders. I’ve noticed the default on a lot of apps and brokers is the line chart. Lets break down the differences, and why the Candle Chart is the one you need to be using.
The chart below represents a snippet of a standard Candle Chart. Red bars represent a decrease during that specific timeframe, one day in this reference, while the green bars indicates an increase.
There are two main parts of a candle. The wick, the thin line, and the body, the thick line. The wick represents the total movement during that specified time frame, while the body represents the open and close points. So what does that mean?
Take a look at the first green bar. The bar is green so that tells you that during that one day interval it increased in price. Remember: red=down, green=up. If the price increased, we know that the lowest point of the body, the thick line, is where the stock opened for that day, and the top of the body is where the stock closed for that day. In this example, the stock opened at $2.99 and then closed at $3.38.
So what about the wick, or the thin line? That indicates the stock’s full travel during that day. During that day it went as low as $2.89 and as high as $3.42. So remember: Thick line = open/close, thin line = full travel. If you look at the next green day, the body is small, but the wick is long. That means the stock opened and closed around the same price, but it traveled much farther during that day’s session.
Well… So why is that important? Lets take a look at a line chart of the same time frame just for comparison.
I’m sure you can already see the difference. If you were to only use a line chart, you would never know that on that first green day, the stock price travelled all the way down to $2.89. You can only see where it closed at $3.38.
As a trader, you need to be able to see the full price movements to understand where stocks may have built previous supports or where the next resistance might be. Candles are the easiest way to do that.