Investor Education
Introduction to Candlestick Charts
What does a modern stock market analyst and a 17th century Japanese rice trader have in common?
A little more than you may think.
In fact, both have been known to be fond of a very particular charting technique to describe trading sessions. Today, we call this style of stock chart a candlestick chart, and it is regularly used by investors and technical traders to gauge the momentum of securities.
Candlestick Charts
Today’s infographic comes to us from Hantec Markets, and it provides an introduction to how candlestick charts work. Further, it explains some common patterns, and how they are generally interpreted by investors.
Candlestick charts are often used by traders to help interpret the day-to-day sentiment behind a security.
If the sentiment changes, a trend reversal may be in store – and an opportunity to take advantage could be in sight.
The Basics
Candlestick charts show the price action of a security over time, and each individual candlestick indicates four pieces of data for a particular session: the high, open, close, and low price for a security.
Meanwhile, the color of the candlestick indicates the direction of the session: white means the close was higher than the open (bullish), while black means the close was lower than the open (bearish).
Note: it’s common to see candlesticks charted using green and red colors, as well.
Patterns Worth Knowing
While recognizable trading patterns with candlestick charts can get complex, there are some important nuts and bolts to consider beforehand:
Spinning Top: These have long shadows and short bodies, taking the shape of a spinning top toy. They can be interpreted as indecisive periods of trading – and if following a long uptrend or downtrend, could be seen as showing the bulls (or bears) losing control.
Marubozu: A marubozu is only represented by a body, meaning the high and low are the same as the open and close. In other words, these are very bullish or bearish, depending on their color.
Doji: A doji is when the opening and closing price are the same, resulting in a small body.
These are just the most basic formations, and it’s possible to dive into candlestick charts much deeper.
Here’s a simple primer that reviews the above, but takes things a step further.
Investor Education
Visualized: A Step-by-Step Guide to Tax-Loss Harvesting
In Canada, tax-loss harvesting allows investors to turn losses into tax savings. This graphic breaks down how it works in four simple steps.
A Step-by-Step Guide to Tax-Loss Harvesting
Market ups and downs can be unnerving, but the good news is that tax-loss harvesting allows investors in Canada to capture tax savings when their portfolio drops in value.
While it sounds complicated, a tax-loss harvesting strategy is actually fairly straightforward. An investor can use capital losses to offset capital gains found elsewhere in their portfolio, leading to a lower tax bill. While there are important conditions to keep in mind, investors can use this strategy to enhance portfolio returns over time by reinvesting these tax savings.
This graphic from Fidelity Investments shows how tax-loss harvesting works and why it may improve tax efficiency in an investor’s portfolio.
Breaking It Down
Consider a person who invested $50,000 in a mutual fund held in a non-registered account that has dropped by $10,000 in value. To help minimize losses, they took the following steps in a tax-loss harvesting strategy.
For the sake of this example, taxes are based on the maximum federal rate and the average maximum provincial tax rate.
- Sold investment with a $10,000 loss
- Invested $40,000 into a different mutual fund
- Used the $10,000 capital loss to offset capital gains realized elsewhere in the non-registered portfolio
- Achieved up to $2,550 in tax savings
The investor realized as much as $2,550 in tax savings by utilizing a $10,000 loss against a $10,000 capital gain. Without tax-loss harvesting, this $10,000 capital gain would be taxed at a 50% capital gains inclusion rate ($10,000 X 50% = $5,000). This $5,000 in applicable gains is then taxed at a 51% combined federal and provincial tax rate ($5,000 X 51% = $2,550 in taxes owed).
In contrast, by using tax-loss harvesting, the investor would have achieved up to $2,550 in tax savings.
What’s more, you can reinvest your tax savings over each year—which may help boost portfolio returns over time if the new investment increases in value.
Tax-Loss Harvesting Tips
With a tax-loss harvesting strategy, here are some key tips and considerations to keep in mind:
- Investment Timeline: A capital loss can be used to offset capital gains not only in the current year, but in the three years prior and/or any year indefinitely in the future.
- New Investment Type: After selling an investment that’s dropped in value, it’s important to buy a different investment to avoid triggering the ‘superficial loss rule’. Investors can aim to choose an investment with similar long-term returns.
- Plan for Year-End: In order to achieve a capital loss, plan to sell an investment at least two to three days before the year’s final trading day so the investment settles before year-end.
Together, these tips can help investors strategically execute a tax-loss harvesting strategy.
Tax Made Easier
During volatile markets, investors can seize the opportunity to turn losses into tax savings using tax-loss harvesting as a key tool to help generate higher after-tax returns.
Explore Fidelity’s tax calculator to discover tax-saving opportunities.
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