Understanding Candlestick Charts

CANDLESTICK CHART READING – TALKING POINTS

• Candlestick charts are very different from the standard bar chart.
• Candlestick charts are typically preferred by traders for day trading because they provide a pleasant visual perception of price.
• To use candlestick chart analysis as part of a trading strategy, it’s crucial to comprehend the essential elements of a candle and what they signify.

A CANDLESTICK CHART IS WHAT?

Traders use candlestick charts to comprehend price action because they are simply charts made up of individual candles. Candlestick price action involves identifying the price highs and lows for a given period, as well as where the price opened and closed for that period.

Traders in all financial markets can learn about trends and reversals from price action. For instance, patterns made up of multiple candlesticks can appear on forex charts and may signal trend reversals or continuations. Candlestick Charts can also form unique patterns that could signify market buy or sell entries.

The time frame the trader selects determines the period that each candle represents. The candle will show the open, close, high, and low for the day because that is a common time frame. The various characteristics of a candle can aid in predicting where the price may go; for example, if a candle closes substantially lower than it opened, this may indicate further price declines.

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How to Interpret a Candle on a Stick Chart

The picture that follows shows how a typical Candlestick Charts are made. A price candle is made using three specific points: the open, close, and wicks. The open and close prices of the candles should be taken into account first. These points serve as the foundation for the body of a candle and show where the price of an asset starts and ends for a given time period. When viewing the chart, you can select a specific time period for each candle to represent the price movement. If you are viewing a daily chart, each candle will show the day’s open, close, upper wick, and lower wick.

Open price:

The first price traded during the creation of the new candle is represented by the open price. The candle will turn green or blue if the price begins to trend upward (colors vary depending on chart settings). The candle will turn red if the price drops.

High Price:

The highest price traded during the period is indicated by the top of the upper wick/shadow. The open price or the close price was the highest price traded if there is no upper wick or shadow.

Low Price:

If there is no lower wick or shadow, the lowest price traded is equal to the close price or open price of a bullish candle, or it is the price at the bottom of the lower wick.

Close Price:

The closing price represents the final transaction made during the candle formation period. In most charting software, the candle will automatically turn red if the close price is lower than the open price. The candle will be green or blue if the close price is higher than the open price (also depends on the chart settings).

The Wick:

The wick, also known as a “shadow,” is the next crucial component of a Candlestick chart. These details are crucial because they display the price extremes for a particular charting period. The wicks are easily distinguished because they appear to be thinner than the candlestick’s body. Here is where candlesticks’ durability is revealed. Candlestick Charts can be used by traders to help them focus on market momentum rather than on static price extremes.

Direction:

The color of the candlestick indicates the price direction. If the candle’s closing price is higher than its opening price, the price is rising and the candle will be green (the color of the candle depends on the chart settings). The price closed below the open if the candle is red.

Range:

A candle’s range is the variation between its highest and lowest price. The price at the top of the upper wick can be used to calculate this by deducting it from the price at the bottom of the lower wick.

Bar Chart vs Candlestick Chart

The illustration below demonstrates how candlestick charts have a clear advantage over bar charts. Candle charts are more aesthetically pleasing than bar charts, which also differ from price patterns or candle formations. The bars on the bar chart also make it challenging to see which way the price changed.

CANDLESTICK CHART READING

A candlestick chart can be used and read in many different ways. The timeframe and trading strategy you prefer will affect how you analyze candlestick charts. Some approaches try to benefit from candle formations, while others try to identify price patterns.

How to interpret single candle formations

Individual candlesticks can reveal a lot about the mood of the market at the time. Candlestick patterns like the Hammer, shooting star, and hanging man provide hints about shifting momentum and perhaps even the direction that market prices may be trending.

The image below shows how the Hammer candlestick formation can occasionally signal a change in trend. The hammer candle formation has a small body and a long lower wick. Prices increased from opening to closing. The idea behind the hammer formation is straightforward: As the price attempted to fall, buyers entered the market, driving it up. To buy into the market, tighten stop-loss protection, or exit a short position is a bullish signal.

By entering a long trade after the hammer candle closes, traders can profit from hammer formations. Trading with hammer candles is advantageous because “tight” stop-loss orders can be used (stop-losses that risk a small amount of pips). Take-profits should be positioned to guarantee a favorable risk-reward ratio. The take-profit therefore exceeds the stop-loss.

Identifying price trends across multiple candles

Trading professionals can identify price patterns on the charts with the aid of candlestick charts. Recognizing these price patterns, such as the triangle pattern and the bullish engulfing pattern, allows you to profit from them by using them as signals to enter or leave the market.

For instance, the bullish engulfing price pattern can be seen in the image below. A red candle and a blue candle together ‘engulf’ the entire red candle to form a bullish engulfing. It is a sign that a currency pair’s long-standing weakness might be coming to an end. After the blue candle closes, a trader would profit from this by opening a long position. Keep in mind that the price pattern only develops after the second candle.

A trader would set a stop loss below the bullish engulfing pattern, just like with the hammer formation, to guarantee a tight stop loss. A take-profit would then be set by the trader. Check out our forex candlesticks guide, where we go into great detail about the benefits of candlestick charts and the strategies that can be used with them, for more forex candlestick charts.

ADDITIONAL GUIDELINES FOR READING CANDLESTICK CHART

Be aware of the following when reading candlestick charts:

• The trading time frames.
• conventional price patterns.
• Price movement.

We at DailyFX provide a variety of forecasts on commodities like gold, oil, equities, and currencies to help you with your trading. It is also worthwhile to watch our webinars where we discuss a range of subjects, including price action and fundamentals that could impact the market.

FAQ

How can a bullish candle be identified?

A black or filled candlestick is bearish and denotes selling pressure because it means the closing price for the period was lower than the opening price. A white or hollow candlestick, on the other hand, indicates that the closing price was higher than the opening price. This indicates buying pressure and is bullish.

What candlestick pattern has had the most success?

One of the most potent candlestick patterns is the engulfing pattern, which consists of two candles. It happens when the second candle, or the most recent candle, completely engulfs or overshadows the first candle. Symbolically, it denotes either a victory of buyers over sellers or the opposite.

For beginners, how do candles work?

Wax inside and close to the wick melts when a candle is lit. The liquid wax is absorbed by the wick, which draws it upward. Wax is vaporized by the flame’s heat, and this vapor is what burns.

Can candlesticks actually be used?

Market participants are drawn to candlestick patterns, but many of the reversal and continuation signals that these patterns emit don’t consistently function in the current electronic environment.

How can a bullish or bearish candle be identified?

The image above shows two types of fundamental candlesticks: A bullish candle is one in which the close exceeds the open (usually green or white) When the close is lower than the open, a bearish candle is formed (usually red or black)

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