Candle Stick Charts

Candlestick charts have been around for hundreds of years. They are often referred to as "Japanese candles" because the Japanese would use them to analyze the price of rice contracts.

Similar to a bar chart, candlestick charts also display the open, close, daily high and daily low. The difference is the use of color to show if the stock went up or down over the day.

The chart below is an example of a candlestick chart for AT&T (T). Green bars indicate the stock price rose, red indicates a decline:

Investors seem to have a "love/hate" relationship with candlestick charts. People either love them and use them frequently, or they are completely turned off by them. There are several patterns to look for with candlestick charts - here are a few of the popular ones and what they mean:

This is a bullish pattern - the stock opened at (or near) its low and closed near its high

The opposite of the pattern above, this is a bearish pattern. It indicates that the stock opened at (or near) its high and dropped substantially to close near its low.

Known as "the hammer", this is a bullish pattern only if it occurs after the stock price has dropped for several days. A hammer is identified by a small body along with a large range. The theory is that this pattern can indicate that a reversal in the downtrend is in the works.

Known as a "star", this pattern is used in other patterns such as the "doji star". For the most part, stars typically indicate a reversal and or indecision. There is a possibility that after seeing a star there will be a reversal or change in the current trend.

So this is the basics of candle stick charting. Of course there are many other patterns, but this should get you started.