How to read the stock market?

I owe an apology to the readers who eagerly look for my blogs to level-up their understanding of capital markets. There were lot of things going on at my personal end that I was barely able to find time to analyze charts let alone writing detailed blogs. After making necessary arrangements, I was able to free up some of my bandwidth hence, for the pure love of writing and teaching capital market from my experience, I wish to continue our blogs. This is Blog #3 in our series of blogs on swing trading. If you are new to our website I would recommend you to go through Blog-2 and Blog-1. This will set the context for this and upcoming blogs. Ask yourself this question: What happens when one invests money in the stock market? Well, there are two outcomes either they make profit on their investment or they make loss. If one can read and understand the stock market, can he or she increase the probability of making profit on their investment?- Yes. Technical analysis of candlestick charts is one such way to do so. Candlestick chart looks something like this:

Fig-1: Candlestick chart

Don't get confused by seeing the above candlestick chart as we are now going to dissect different type of candlesticks one-by-one with their appearances and meaning. Let's start with the basics first. Every candlestick has 4 main data points: Open, Close, High and Low. One candlestick can represent 1 minute, 5 minutes, 1 day, 1 week or 1 month as we change the timeframe the data it represents will also change and accordingly, our view of the market or security.

Fig-2: Data points in a candlestick

Fig-2 shows a green candlestick with its parts: Body, Lower wick and Upper wick, and 4 data points on daily time frame. Here is what these 4 data points represent: Open - It is the price at which the security starts trading as soon as the market opens at 9:15 am IST. High- It is the highest price the security touches during the day. Low- It is the lowest price the security touches during the day.

Close- It is the price at which the security closes as soon as the trading day ends at 3:30 pm IST. You can plot this candlestick chart for almost all the financial instruments like Stocks, Futures, Commodities, Options, Cryptos, Exchange-traded Funds, Bonds, Indices etc. all these are called securities hence, I have broadly used the term 'security'. As you can see in Fig-2 the close price is higher than the open price which shows strength or bullishness in the stock on that particular day which is represented by the green color.

Fig-3: See the difference in open and close price in comparison to Fig-2

Fig-3 shows a red candlestick with its parts: Body, Lower wick and Upper wick, and 4 data points on daily time frame. Don't miss the difference between the open and the close price as compared to Fig-2. In this case the close price is lower than the open price of the day which shows weakness or bearishness in the price of that stock on that particular day which is represented by red color. You will see such candlesticks in different shapes and sizes all over the chart. Let's deep dive into them and understand how to make sense out of them.

Fig-4 Bullish Candlesticks

Fig-4 shows the degree of bullishness from left to right. The candlestick on the extreme left is the most bullish candlestick it has no upper or lower wicks which means open=low and close=high, as we move on to the right the bullishness keeps on decreasing. Reading a candlestick alone does not give much context about the direction of the price rather it should be read in context with the ongoing trend and market conditions.

Fig-5 Bearish Candlesticks

Most of the candlesticks that you will observe will come from these 10 candlesticks(Bullish-5, Bearish-5) with some variation in the size of the body or the wicks. Bigger the body stronger the sentiment of market participants- bullish in case of green candlestick and bearish in case of red candlestick. Short size candlesticks show little price movement and represent consolidation hence, a proper breakout or break down is required to gain clarity on the direction of the price.

One such candlestick on daily time frame will only tell you the market participant's activity on that day and just one candlestick should not be used to form the view about the future direction of price. It should be analyzed in context with the overall trend and market conditions. (Made the point 2nd time purposefully) We are further going to study these candlesticks on the basis of:

• Size of the body

• Size of the upper and lower wicks
  

Size of the body

Bigger the body of the green candle with very tiny or no wicks, stronger the buying pressure. Bigger the body of the red candle with very tiny or no wicks, stronger the selling pressure. After an extended decline in price, appearance of big green candle can indicate the reversal in trend. After an extended rise in price, appearance of big red candle can indicate the reversal in trend. Such big red and green candles act as key areas of resistance and support respectively. Small body candles represent miniscule or no movement in the price, they are generally formed in consolidation phase. A proper breakout or breakdown should be awaited before creating a view on the movement of price further on the up or down side respectively.

Fig-6: Small body v/s long body candlesticks

Size of the upper and lower wicks

You may come across some of the candlesticks which will have very thin body but long upper or(and) lower wicks. Refer Fig-7(a): Long lower wick shows that bears pushed the price of the stock to low during most of the session but then bulls stepped in and started aggressive buying and pushed the price of the stock near its open or in some cases surpassed it to create a new high in very less time as compared to bears and hence ending up dominating the session. Refer Fig-7(b): Long upper wick shows that bulls pushed the price of the stock to high during most of the session but then bears stepped in and started aggressive selling and pushed the price of the stock near its open or in some cases surpassed it to create a new low in very less time as compared to bulls and hence ending up dominating the session. Refer Fig-7(c): Next set of candles are those candles which have very thin body but long upper or(and) lower wick(s) where open and close are very near or negligible body where open=close. It shows great amount of indecisiveness hence, we can not infer whether the price of the stock will go up or down. On the basis of appearance of these candles only, an inference about the future movement of the price can not be made, understanding of the trend and overall market conditions play a crucial role.

Fig-7 Candlesticks with long wicks

I hope you enjoyed our today's blog. Thank you for your time ! You can connect with me over LinkedIn and X(Twitter) I'm a student for life, so don't hesitate to send over your views or sources to refer to help me enlighten myself. You can also subscribe to our weekly newsletter(to be launched soon) and know the pulse of Indian and US stock market and remain ahead in generating Return on Investment(ROI) by reading our weekly while sipping your Sunday morning coffee.

If you are an experienced trader then below links of real trade execution might help in stepping up:

• July-23 trade in GRSE made a profit of Rs. 201,453

• July-23 trade in ACE made a profit of Rs. 40,300

• Aug-23 trade in SCHNEIDER made a profit of Rs. 56,406

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