Know Your Candlestick Chart: Narrow vs Wide

Meir Barak |

Candles.jpgNarrow Range Candle

The narrow range candle shows a relatively short distance between the opening and closing price. But relative compared to what? To the common behavior of the stock being examined. Every stock has its own “personality,” and a candle can only be defined as short (narrow) or long (wide) if you observe the stock’s behavior over a representative timeframe in which you can see the conduct of many candles. 

For a stock such as Apple, Inc. (AAPL) , a narrow range intraday candle of five minutes might be from ten to thirty cents. Although by contrast, for most stocks, it would be considered long range.

Primer to a Narrow Range Candle:

  • A narrow range candle indicates low volatility. 
  • A relatively small change in the balance between buyers and sellers indicates, in many cases, sharp movement anticipated in the near future in one or the other direction.
  • A narrow range candle also indicates that buyers and sellers hold close to equal force, as occurs with the candle called a “doji.”  It is not a perfect balance, as represented by the doji, but does have clear significance.

A candle has little meaning in and of itself, but becomes more important when we observe its position in the formation of several candles. For example, a narrow range candle has one meaning if it follows several more narrow range candles, and a different meaning following several wide range candles. As with the doji, a narrow range candle also hints at an imminent trend reversal, and provides greater reliability to the reversal pattern.

Wide Range Candle

Here are examples of what candle colors and lengths mean:

  • When the candle is light-colored, the buyers are in clear control
  • When the candle is dark-colored, the sellers are in clear control
  • The longer it is, relative to the other candles, the clearer and stronger the control

Narrow and Wide Range Candle in AAPL with Five-Minute Candles

AAPL_Chart_8_18.jpg

Narrow-wide

In the narrow range candle [1], the distance between the opening and closing price is very small and almost insignificant. The narrow range, as noted, is a relative term. For AAPL, a range of five cents between opening and closing prices, as we see in this candle is a miniscule range, but in other stocks such as Microsoft Corporation (MSFT) , it may indicate a relatively wide range.

When we compare the narrow range candle [1] with the wide range candle [2], the narrow and wide ranges become clear specifically for AAPL. In the wide range candle [2], the range between opening and closing prices is 50 cents. Observing this candle relative to adjacent candles, we have no doubt that in that five-minute timeframe, sellers strongly controlled the stock. The very fact that after five minutes of seller control a balance was reached between sellers and buyers, as expressed by the narrow range candle [1], indicates that the battle for control is peaking and could shift to the opposite group. In this case, we can see immediately following the narrow range candle that the buyers did take over. Very often, a narrow range candle does indicate a change of direction, known as “price reversal.”

What is the Stock’s Trend?

From the chart above, we cannot see sufficient candles to ascertain the trend. But let us assume for now that since the start of trading, AAPL is trending up. Because, statistically speaking, the chances of the trend’s continuing upward movement are stronger than the chances of it changing, the narrow range candle [1] has a strong chance of being followed by an uptrend and control would return to buyers, which is what happened.

To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer." 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
AAPL Apple Inc. 113.95 1.83 1.63 34,402,627
MSFT Microsoft Corporation 61.97 0.96 1.57 27,349,356

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