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
How MSCI Builds Thematic Indexes: A Step-by-Step Guide
From developing an index objective to choosing relevant stocks, this graphic breaks down how MSCI builds thematic indexes using examples.
How MSCI Builds Thematic Indexes: A Step-by-Step Guide
Have you ever wondered how MSCI builds its thematic indexes?
To capture long-term, structural trends that could drive business performance in the future, the company follows a systematic approach. This graphic from MSCI breaks down each step in the process used to create its thematic indexes.
Step 1: Develop an Index Objective
MSCI first builds a broad statement of what the theme aims to capture based on extensive research and insights from industry experts.
Steps 2 and 3: List Sub-Themes, Generate Keyword List
Together with experts, MSCI creates a list of sub-themes or “seedwords” to identify aligned business activities.
The team then assembles a collection of suitable documents describing the theme. Natural language processing efficiently analyzes word frequency and relevance to generate a more detailed set of keywords contextually similar to the seedwords.
Step 4: Find Relevant Companies
By analyzing financial reports, MSCI picks companies relevant to the theme using two methods:
- Direct approach: Revenue from a company’s business segment is considered 100% relevant if the segment name matches a theme keyword. Standard Industrial Classification (SIC) codes from these directly-matched segments make up the eligible SIC code list used in the indirect approach.
- Indirect approach: If a segment name doesn’t match theme keywords, MSCI will:
- Analyze the density of theme keywords mentioned in the company’s description. A minimum of two unique keywords is required.
- The keyword density determines a “discount factor” to reflect lower certainty in theme alignment.
- Revenue from business segments with an eligible SIC code, regardless of how they are named, is scaled down by the discount factor.
The total percentage of revenue applicable to the theme from both approaches determines a company’s relevance score.
Step 5: Select the Stocks
Finally, MSCI narrows down the stocks that will be included:
- Global parent universe: The ACWI Investable Market Index (IMI) is the starting point for standard thematic indexes.
- Relevance filter: The universe is filtered for companies with a relevance score of at least 25%.
- False positive control: Eligible companies that are mapped to un-related GICS sub-industries are removed.
Companies with higher relevance scores and market caps have a higher weighting in the index, with the maximum weighting for any one issuer capped at 5%. The final selected stocks span various sectors.
MSCI Thematic Indexes: Regularly Updated and Rules-Based
Once an index is built, it is reviewed semi-annually and updated based on:
- Changes to the parent index
- Changes at individual companies
- Theme developments based on expert input
Theme keywords are reviewed yearly in May. Overall, MSCI’s thematic index construction process is objective, scalable, and flexible. The process can be customized based on the theme(s) you want to capture.
Learn more about MSCI’s thematic indexes.
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