Ask The Trader
Wednesday, November 08, 2000
Why do you use candlesticks charts almost exclusively? What's a Dragonfly Doji?
I've always used bar charting, but I notice that you use candlesticks exclusively in your analysis. Is there any advantage to candlesticks? Furthermore, what's a charting dragonfly?
Candlestick charting is becoming more popular among serious traders. This method of charting records the exact same data that bar charting does. In other words, it charts the open, close, high and low for the day. Visually, however, candlesticks charts are far superior to bar charts.
Candlesticks are composed of a thin line called the "shadow," which show the period's range from high to low. Additionally, candlesticks are made up of the "real body," which is the wider part of the bar. The real body displays the difference between the open and the close. If the close is higher than the open, the real body is commonly filled in green or white. On the other hand, if the close is lower than the open then the real body is filled in red or black.
The big difference between bar and candlestick charting, though, is how you can interpret the resulting patterns that candlesticks produce. One such pattern is the Dragonfly Doji (yes, the names are quite interesting). This pattern is formed when the close corresponds to the open with a shadow extending below the close. This pattern is generally considered bullish, since the stock has shown it can recover from a downturn. Patterns like the Dragonfly Doji are just too difficult to decipher using bar charts along.
The key to successful candlestick charting is understanding the relationship between the opening tick and the close. By filling in the real body, as candlestick charts do, trends become more easily identified.
We use candlesticks in our analysis because we feel they are easier to read than bar charts. However, like everything else in the world of charting, everyone has his or her own preferences and biases, so there is no right or wrong chart to use. The bottom line is go with the charts that most efficiently displays the trading information most important to you.
Good Luck and have a profitable trading day.