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Vladimir P

Candlesticks explained in a simple way

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Hello team,

 

I'm having trouble to understand candlesticks and what they really indicate. Can someone explain me this? So far I've gotten that candlesticks have body and sometimes wicks. Green body - bullish candlestick, red body - bearish one (from Andrew's book). But what does opening / closing body of the candlestick mean? Let's pretend I have a stock on a 1 minute chart with green candlestick where bottom of it at $20, and top of it at $23. What does it mean?

1. Does that mean that some group of investors started offering $20 per share at a given point of time, but somehow ended up with paying $23? If I would be one of the investor within that group, does that mean I make bid on buying at $20, but within next 55-58 seconds I ended up being charged $23 instead? Same for red candlestick: if I want to sell my stock for $23, why would I sell it for $20? Doesn't make sense for me absolutely.

2. Does that mean that the entire negotiation period of buying these package of shares lasted for 1 minute? What if investor entered the trade at 59th second and make a bid, is this investor's record being transferred to the next candlestick?

 

My next concern regarding wicks of the candlestick. What do they really represent. According to the book top wick represent high, bottom candlestick represent low. But high / low of what? Let's pretend I have a stock on a 1 minute chart with green candlestick where bottom of it at $20, and top of it at $23, top wick at $25, bottom wick at $18. What does it mean?

1. Does that mean that some group of investors is willing to buy a stock so hard that they even want to pay $25 per share, but ended up being charged only $23 per share? Ideal trade though. Doesn't make sense for me absolutely.

2. Does that mean that some group of investors is not really willing to buy a stock that they offered to pay only $18 per share, but apparently they being charged $20 per share? Were they robbed in this situation? Doesn't make sense for me again and again.

 

Any simple explanation will be helpful. Sorry for being so detailed in this question.

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Aznariy, I think you are confusing bid/ask (Level 2) with actual executions (Time/Sales). Bid/Ask doesn't show up in the candlestick; only transactions where shares were exchanged at a specific price do. Let me try to answer all of your questions with a simple example.

 

Say you and I are trying to buy stock ABC. Brian and Andrew have shares to sell. Us four are the only participants in the market. The bell rings at 9:30:00. A candle is about to be born.

 

You bid $8 for one share and I bid $9. These will show up on the bid of L2. On the other side of the book, Andrew wants $11 for his share. Brian however, only wants $10. So their orders show up on the ask. Note that all of these orders are LIMIT orders, and since nobody has agreed on a price, no shares have changed hands.

 

Let's say I change my mind and convert my limit order (for $9) to a market order. Since Brian has the lowest ask at $10, I buy that share from him for $10. This marks the first exchange of shares for the 1 minute period. For simplicity sake, say that the transaction went through at 9:30:01. That is point A.

 

Red Candle

 

Now the only bid left is yours for $8, and the only ask left is Andrew's at $11. Say Andrew decides to come down with his price to $10--and at the same time--you decide to bid lower at $7. Since nobody has agreed on a price--and no shares have changed hands--nothing happens. The candle is unchanged. It is a horizontal line at $10 (where mine and Brian's transaction occured). The time is now 9:30:30.

 

Out of desperation, Andrew decides to sell at market. Since your bid of $7 is all that is left, the transaction clears at that price. The time is now 9:30:45 and point B marks your transaction.

 

Now as the 1 minute mark comes to an end, you and I hold shares of ABC. Brian sees that the price has tanked to $7 and wants to hold some for a swing trade. At the same time, I decide to sell with a limit price of $8. Brian scoops up my shares with a market order for $8. The time is now 9:30:55. The price is at point C.

 

Finally, as a few seconds remain until the candle closes, you decide to sell your share at $9. Nobody else in the market wants to buy. So the candle closes at the last price of $8, where Brian bought my share (point C). There is no top wick since the highest price paid was also the open price ($10). The bottom wick is where you bought from Andrew at point B. The candle is red because it opened at $10 and closed at $8.

 

Now the time progresses to 9:31:00. Whatever price transactions occur at will be logged on the Time/Sales and start forming a new candlestick. Without listing specifics, say the first transaction occurred at $8. There were multiple transactions at $8, and this was the lowest anybody paid during that 1 minute. In this case, there is no bottom wick. This is because the open equals the lowest price paid. The last transaction to occur before the end of the candle (9:31:59) was $11. That was the close. At sometime between 9:31:00 and 9:31:59, somebody paid $12. That is the top wick.

 

Green Candle

 

Here is an Investopedia article on candlesticks. If anyone sees any errors above, or has a better way of explaining, please let me know. Thanks.

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A candlestick is a visualization of the price range (all the completed orders) of a stock in a given time period.

 

The open of a candlestick is the first order to go through for that time period.

The close of the candlestick is the last order to go through for that time period.

And the wicks would be all orders to go through that are above or below the opening and closing prices.

 

A bit too brief but hope that helps.

 

 

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