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Do you know how to read candlestick charts?
If you are new in stock trading, it’s better if you don’t trade for a while and learn how to read candlestick charts before starting your trade.
As a trader, understanding candlestick charts is vital. These charts can be used to better understand the current market sentiment, price trends and even predict short-term future price movements.
Candlesticks are an effective way to analyze stocks, and with the help of this guide, you’ll be able to make sense of all the information easily.
This article will teach you everything about candlesticks, so next time you can make better decisions. Let’s get started!
What is Candlestick Chart
A candlestick chart is a type of financial chart used to describe price action in stocks, futures and options.
A candlestick provides a depth of data via its open-high-low-close (OHLC) categories and highlights the magnitude of price moves with its body, shadows and colours.
Candlestick charts were created by a rice trader, Homma Muneshige, who wanted to draw attention to important market turning points. He used red ink to mark losing days and green ink to mark winning days.
Red and green hark back to the Chinese colour-coding system for luck, prosperity, and danger. The colour of the candlestick is used to distinguish whether the price went up (green) or down (red).
Candlestick charts are used to provide a rich visual representation of price action. They provide an alternative view, or “second dimension,” in addition to the line and bar charts and are often found together with them.
Candlestick charts are now used in technical analysis as a way to analyze price trends and for the trading of stocks, futures, and other financial instruments.
Candlesticks are used to determine the entry and exit points for trades as well as helping to identify trends, reversals, gaps, momentum, and support and resistance levels.
In addition, traders will use candlesticks as confirmation or reversal indicators by looking for patterns that match a predetermined trading strategy.
Candlestick charting provides for more clarity and greater insight into price action than other forms of charting.
Candlestick charts can be used to trade in any market, on any timeframe. Candlestick charting has gained widespread use due to computerized charting software.
The candlesticks also tell Volume of trading (total number of shares traded during the time interval);
Basic Candlestick Chart
A Candlestick Chart is made of two parts, the Body and the Wick. There are four major elements to a Candlestick Chart: the Open, High, Low and Close.
Body: The body of the candle represents the range between the open price and close price (high and low) of the time period. It can also be thought of as “the range for the day.”
Candlesticks with a larger body represent the price move between open and close, while smaller bodies mean less volatility (and therefore less of an interest in the security).
Wick: The wick or shadow is the thin lines that appear on each side of the body as shown in the above figure.
A Wick is a thin vertical line that provides information about the opening and closing prices for each period.
Open: The first price of a security during a particular time period.
Close: The closing price of a security during a given time period, typically for day traders this would be the last trading minute.
High: The highest price on a security that was traded in a certain amount of time. This tells people how the supply and demand are working.
Low: The lowest price on a security that was traded in a certain amount of time. This tells people how the supply and demand are working.
How to Read Candlestick Charts
It’s very difficult for beginners to read the candlestick chart, as there are many unknown patterns when you first start. But with practice, it gets easier.
You can read the chart by looking at the following things in a candle:
- Opening price (candlestick body)
- Closing price (candlestick body)
- High price (top of the candlestick body)
- Low Price (bottom of the candlestick body)
- The colour or tint of the candles
If you have a good understanding of these terms, it is easy to tell whether the market sentiment is bearish, bullish or neutral. Also, you can use this information for your trade.
By reading Japanese candlestick charts and grasping the technical analysis behind those charts, I have been able to make more profit from the market.
Traders can see the trading price range of a stock at one glance by looking at candlestick charts. The colour body indicates if prices are rising or falling and whether they have been doing so for consecutive candles.
If more reds appear in succession, then traders know that prices are declining; however, if there is an abundance of greens following consecutive blues, it means that the market sentiment has changed to bullishness.
A candlestick chart displays the relationship between a stock’s high, low opening and closing price.
Candlesticks Patterns And What They Mean
Candlesticks Patterns are a visual representation of price and volume in the market. Candlestick Chart Patterns are evaluated by the use of two parameters – Price and Volume.
If you look at volume, it tells you about the number of shares transacted during a specific period of time.
Price tells us what happened to the stock price during a specific period of time. It shows us if buyers or sellers were in control during that period.
Thus, by putting both the parameters together – Price and Volume – we can get a sense of who is winning (the buyers or the sellers).
The chart patterns signify what was going on with volume and price action in the past. We can use these patterns to predict what could happen in the future.
The following are the different types of Candlesticks patterns:
1. Inverted Hammer Pattern:
These Candlesticks patterns are formed when the price is trending down. An inverted Hammer pattern could be a reversal signal, which indicates that the price may begin to rise again after it has fallen.
These patterns have long upper shadows and short or no lower shadows with small body sizes (green or red).
The small body suggests that prices have been stable at this level, while the long upper shadow indicates a possible weakening of bears and a hint that bulls may be gaining control over prices.
The market is oversold when to form this candlesticks pattern and hence it will face up move. The Inverted Hammer Pattern is a sign that the bears are losing control of the market and it can be a bullish sign.
The breakout point of this candlestick pattern could be a good support level for buying at a lower price. The stop loss level should be placed below the lowest of the day.
2. Shooting Star Pattern :
These Candlesticks patterns are formed when the price is trending up. In this pattern, a star is formed at the end of one of the preceding price bars (which you can see in the below image).
These stars have long upper shadows and short or no lower shadows which makes their bodies small. This signifies that they are untrustworthy and unstable.
For confirmation of these patterns, the following conditions are necessary:
- The price should be trending up at the time of pattern formation (see arrow in above image).
- There should not be any significant gap between two Candlesticks — a small gap is permitted because it can’t always get the exact point where the star gets formed.
- The candle after the shooting star Candlestick should be a Red one. Red candle can be used as a confirmation candle.
3. Bullish Engulfing Pattern :
It is a pattern that is formed at the end of a downtrend, indicating a reversal.
If you see 2 ‘candles’ in this pattern then the first should be bearish and the second should be bullish indicating that trend is reversing Directions.
Here we have seen a red candle followed by a green candle. The green candle engulfs the previous red candle.
This signifies that bulls are taking control of the market and the direction has moved from bearish to bullish. If we look at the “green” candles they should be large.
4. Bearish Engulfing Pattern:
It is a pattern that is formed at the end of an uptrend, indicating reversal Directions.
If you see 2 ‘candles’ in this pattern then the first should be bullish and the second should be bearish indicating that trend is reversing Directions.
Here we have seen a green candle followed by a red candle. The red candle engulfs the previous green candle.
This signifies that bears are taking control of the market and the direction has moved from bullish to bearish. If we look at the “red” candles they should be large.
5. Doji patterns:
A Doji is defined at the opening price and the closing price are almost equal. The Doji pattern is a sign of indecision among market participants on either direction of prices. it can be taken as an indicator to determine whether the current trend will continue or change
The chart below shows an example of a Doji pattern with a very short upper shadow and very short lower shadow.
A Doji is a potential reversal pattern that occurs at the top or bottom of an existing trend and consists of only one candle. It looks like a cross, inverted cross or plus sign (+).
A Doji is more significant when it occurs near support or resistance levels, such as highs or lows around trendlines, moving averages, etc.
6. Bullish Harami Pattern :
It is a reversal signal pattern. It consists of two candles; the first candle is red and the second one Green. The opening and closing prices of the green candle must be contained within the body of the red candle.
When this happens, it indicates that bulls haven’t completely dominated bears but they are trying to regain control or overpower bears. It is a very bullish signal which shows that bulls have started taking control and gives the signal to open a long position in the market.
7. Bearish Harami Patterns:
A Harami pattern is a reversal candlestick pattern. It consists of two candles; the first candle is green and the second one Red.
The opening and closing prices of the red candle must be contained within the body of the green candle. Bullish harami reflects a bearish sentiment in the market.
8. Morning Star:
A morning star is a bullish reversal pattern, consisting of three candlesticks. The first candlestick is a large red (black). The second candlestick is a small green or red. The third candlestick opens above the second candlesticks high, and it is a large green.
9. Evening Star :
It’s a three-candle bearish pattern. The first is the green candle. The second one is like doji or spinning top. The third one has a red body that opens below the low of the second candle.
10. Gartley Pattern or Butterfly pattern :
Gartley is named after its originator, H. M. Gartley. A Gartley pattern can occur in an uptrend or downtrend.
It consists of a trend line connecting two parallel highs with two parallel lows connected by a rectangle.
Why Do We Use Candlestick Charts
Candlestick charts are very popular among traders because they provide a different way of looking at the same information.
They help traders quickly identify the current trend and direction, as well as see potential areas where price might reverse itself. For those reasons, candlestick charts are a valuable tool in any trader’s arsenal
Reasons to use candlestick charts:
1. Candlestick charts gives a different perspective
Candlestick charts show the changes in the prices of a stock. On these, there are periods of a lot of movement and then periods with less movement.
The candlesticks allow you to see this easily without it getting too crowded on the chart.
2. Candlesticks are easy to read and interpret
The body of each candle shows the range between the opening and closing prices over a given time frame.
This makes it easy to quickly determine how the market is doing against a previous day’s close and if the price opened above or below this range, in which direction the trend is likely headed.
The colour of each candle indicates whether buyers are stronger than sellers (green) or vice versa (red).
3. Candlesticks provide reference points
Chartists may draw lines between the low and high of a candle in order to better track its movement. These candlestick patterns can then be used as reference points when evaluating future price action.
For example, if the price has just broken above a consolidation range (henceforth referred to as the “breakout”), prices might continue moving strongly after the breakout.
On the contrary, if the price has just broken below a consolidation range, this is considered to be a very bearish indication and prices are not likely to move too far in that direction.
4. Candlesticks provide trend confirmation or reversal
The shape of each candlestick provides valuable information for confirming or reversing the trend.
5. Candlesticks are used along with other charting tools
Many traders like to use candlestick charts along with other types of technical analysis. Chartists might use candlesticks for the initial analysis of a market to gain insight into how price has performed over the last few days.
Following that, they may look at other technical indicators such as moving averages or momentum oscillators to get a better picture of what is likely to occur next in an asset’s price action.
- Candlestick chart is a type of financial chart that uses candlesticks to represent opening price, high and low prices, and closing price.
- The candlestick is made up of two parts – the body and wicks.
- The length of the body represents how much it changed during the day
- The wicks represent the upper and lower limits of trading for that day
- The colour of the candle shows if it closed at a gain (green) or loss (red).
- There are various types of candles, each one representing different information about what happened to the stock on any given day, such as a bullish candle meaning prices went up from open to close; bearish candle meaning prices went down from open to close; doji candle which has an equal number of red and green sections indicating indecision.
(Q1) What do the wicks and bodies represent?
The body of a candlestick represents the price range between the open and close of a given period, while each coloured “wick” on either end represents its high or low price within that window. The length between wicks also indicates how far prices moved, which can indicate volatility in market sentiment.
(Q2) What is the red or green portion on either end?
It is called the “wick” and represents the highest or lowest price of that period, also known as its range. Depending on how volatile a market was during a given time period, wicks will vary in length from short to long; shorter wicks indicate less volatility in the market.
(Q3) What does the colour of the body represent?
The colour of the candle’s body represents whether prices increased or decreased during that time period: green (up) and white for gains, and red (down) and black for losses.
(Q4) What do the shadows or wick on each candle represent?
If prices open higher than they close, the bottom shadow will be coloured white or green to indicate a gain. If prices open lower than they close, the top shadow will also be coloured black or red to indicate a loss.
(Q5) Does a black or red body represent a down day?
A “red” candle indicates that the security closed at a lower price for that time period, which means that prices decreased and investors sold shares. A “black” candle indicates the same thing: The security closed at a lower price than it opened.
(Q6) Do green or white candles always mean a gain?
A “green” candle indicates that the security closed at a higher price for that time period, which means that prices increased and investors bought shares. A “white” candle indicates the same thing: The security closed at a higher price than it opened.
Candlestick charts are among the most popular chart types in many different markets. The main reason is that they provide much more information than other charts do.
The candlestick chart is a versatile and powerful tool for analyzing the price action of assets. It can be used to understand the market sentiment, identify trends in an asset’s price movement, measure volatility, or evaluate levels of risk.
Candlesticks indicate whether buyers or sellers are currently more active than the other side by showing when prices have risen (green) or fallen (red).
Understanding how they work will help you spot patterns that might lead to profitable trades and increase your chances of success as a trader!
In the above post, I discussed what a candlestick chart is and how to read it – let me know if there were any questions about these concepts!
Disclaimer: The information in this article is for educational purposes only.