Understanding Stocks

LET’S GET TECHNICAL: INTRODUCTION TO TECHNICAL ANALYSIS 111
one that extends to the right. The left tick stands for the opening price
for the trading day, and the right tic marks the closing price.
You can see at a glance, whether the stock closed above or below its
opening price. Generally, it is a good sign if a stock closes the day above
where it started, especially if there is strong volume right into the close.
Candlestick Charts
Candlestick charts are popular with many traders because they show so
much information, including the psychology of the market at any given
time. Many traders believe that understanding the emotions of the market
is helpful in determining future trends. (A 17th-century rice broker
in Japan created the candlestick chart to help him trade rice. As it
turned out, his charting methods enabled him to make a fortune in the
Japanese rice markets.)
Figure 11-3 is an example of a Candlestick chart. As you can see,
candlestick charts use two-dimensional bodies to show the range
between the opening and closing prices of a stock during any period.
The high and low prices are plotted as single lines and are referred to as
wicks (or shadows). The price range between the open and the close is
plotted as a narrow rectangle and is referred to as the body. If the stock
price ended the day above the opening price, the body of the rectangle
is white or clear. If the stock price ended the day below the opening
price, the body is black or solid.
Trend Lines
You could say that one of the main purposes of charting is to spot a
trend in its early stages. A trend is simply the direction in which a stock
is moving over a specific period. A stock usually doesn’t move in a
straight line, which is why spotting the trend direction is so important.
There are actually three types of trends: uptrend, downtrend, and
sideways trend. The goal is to participate in uptrends while avoiding
downtrends. A saying that technicians repeat is, “The trend is your
friend (until it ends).” The idea is to ride a trend for as long as possible
until it runs out of steam.