Seeing is believing Candlesticks are easy to read

It sounds pretty simplistic, but one noteworthy advantage candlesticks have over other charts is their readability. For many people who strain to read the fine print and also for the younger traders who don't want to deal with the headaches that can come from staring at bar charts all morning, candlesticks are an attractive option. Consider Figure 2-1, which displays a bar and a candlestick in a side-by-side comparison.

Figure 2-1 gives you a basic idea of why candlesticks are easier to read, but it doesn't really provide a full picture of why they're also much better at helping traders to visually interpret price action (how the stock or market traded during the day relative to the opening price), which is an essential skill for successful trading. Take a look at Figure 2-1, which takes a couple of weeks' worth of trading data and displays it using traditional bar charts and candlestick charts, respectively.



Figure 2-1:

A bar versus a candlestick.


What makes up a day?

The definition of a trading "day" used to be very simple. Trading was done on a central exchange with specific opening and closing times. For example, trading on stocks listed on the New York Stock Exchange (NYSE) began at 9:30 a.m. and ceased at 4:00 p.m. Now trading in these stocks commences on some electronic communication networks (ECNs) hours before the NYSE opens and hours after it closes. (An ECN is a network of brokerage firms and traders, which allows for trading directly between the brokerage firms and traders.) A "day," therefore, is much different than it was in the past. Throw in futures exchanges and currency markets that trade almost 24 hours a day, and this issue becomes even more confusing. With all that trading outside of exchange hours, what constitutes an actual day, for data purposes?

Currently, in the case of stocks, the official open and close are based on the primary exchange they trade on, but in this world of expanding electronic trading, the actual open and close are becoming more blurred. With respect to futures markets that trade almost 24 hours a day, it's almost impossible to pin down a day. For daily testing, I use data between 7 a.m. eastern standard time (EST) and the close at 3 p.m. to constitute a day.

Notice the dramatic difference between the bar chart and the candlestick chart. By comparing them, you can clearly interpret what's occurred from day to day, including the openings, closings, and how they change from day to day. The candlestick chart is a superior way to interpret the price action from day to day when compared to a bar chart. Don't worry — I cover how to read candlestick charts extensively in several other chapters, but even in this simplistic example you can see that knowing where a stock closed relative to its open on a given day is a powerful piece of information that you can glean quickly from a candlestick chart.

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