Gold and technical analysis: how do I read a chart?

Technical analysis: The basics of a candlestick chart​

Dear Investor,

If you open these pages, odds are you’re interested in buying bullion to protect and grow your wealth.

However, it’s one thing to understand the price of something…it’s another thing altogether to understand what the moving price of something tells you.

For that reason, today we cover one of the basics of technical analysis: understanding a price chart.

Technical price charts are often included in our weekly market updates to help you visualise the movement of bullion prices. However, not everyone knows what those ‘lines’ mean. So, let’s get started with one of the most common price charts used — the candlestick chart.

What is a candlestick?

A ‘candlestick’ as it’s called, is a type of price chart created to reflect movements in the price of a financially traded asset, like shares, bonds and precious metals such as gold and silver.

Candlestick charts are the most used chart in technical analysis for a couple of reasons. They deliver a lot of information in one visual, and they are simple to understand. Which makes them ideal for people new to investing to start with these ones.

How do they work?

A candlestick charts show a person five things: the open and close price for an asset,  the ‘high’ and the ‘low’ for that trading period, as well as showing a chartist the overall direction for the period.

Candlestick charts work well over many different time frames, though the time periods frequently used are hourly, daily, or weekly.

Let’s start with what the body of a candlestick looks like

(Click to Enlarge)

In these examples, I am using green for the ‘up’ days, and red for the ‘down’ days.  These colours are the common ones, but the colour of the candlestick body can be anything. People who are colourblind for example, often opt to have the ‘up’ days shown on their chart as a hollow candle, and the ‘down’ days as an all black candle.

The short version is, there are no fixed rules on what the colours can be, just choose what works for you.

Understanding the body of a candlestick is quite simple. Think of it as rectangle with a spike coming out from the bottom and top of the rectangle. The whole rectangle including the spikes, reveals information about an asset.

The top and bottom of a candle tells us where the price of an asset opened or closed for the trading period. The wide part – called the ’real body’ of the candle – reflects the price difference between the opening and closing price for that session.

For example, on an ‘up day’ – what’s called a bullish candle (green candle) – the bottom of the candle is where the price opened at the start of the trading session. On the same bullish candle, the top is the closing price for that period. The difference between the bottom and top is the change in value for that trading session. A bullish candle (green) tells us that the price for an asset increased.

It’s the opposite for a ‘bearish candle’ – a down day. In this example (red) the opening price for an asset is at the top of the rectangle, and the closing price is at the bottom of the candle.

Signalling to us that the asset’s value declined for the trading period.

Not all candlesticks are the same

No two candlesticks are the same. Asset prices change each trading session, which is why you’ll see candlesticks of varying size on a price chart.

Long green candlesticks are often seen as bullish. Meaning there were more buyers than sellers of an asset. However long red candlesticks are bearish, as it tells us there were more sellers than buyers of an asset, driving the price of something lower. Squat looking candlestick bodies, often lead chartist to conclude the market was indecisive.

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Trading with the Shadows

Another revealing part of the candlestick, is the spikes from either end of the real body. These are called ‘wicks’ or ‘shadows’.

The shadows stick out from the opening or closing price of a candlestick and indicate price action outside of the open and close. In other words, it shows you the high (upper shadow) and low (lower shadow) of an asset price for the trading session.

Some chartists interpret a long shadow as a signal the market will reverse direction. Others see a short shadow as a signal that an increase in price is on the way.

Think of it like this. A long upper shadow is seen as bearish, and the asset price will change direction and head lower. A long lower shadow is seen as bullish, and an asset will start to move higher up again.

(Click to Enlarge)

No shadow at all — just a neat rectangle — is treated as strong conviction in the current price.

That’s the basic of a candlestick chart covered today. Over the coming weeks we’ll start look at what types of patterns candlestick charts can make, what they mean for the price of something.

Until next time,

Shae Russell
Group Communications Manager,
For ABC Bullion