How to Read Candlestick Charts for Beginners

How to Read Candlestick Charts

Not investment advice, or a recommendation of any security, strategy, or account type. Short shadows indicate a stable market with little instability. Candlesticks can be divided into four elements, where each element reveals a different aspect of the current trading behavior and the prevailing market sentiment. “Just starting to learn more about trading, this is good stuff.” Our trained team of editors and researchers validate articles for accuracy and comprehensiveness. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research.

  • Dragonfly doji have a long lower wick, signifying a bear run in the session, followed by a rally back to its opening price.
  • Candlestick graphs give twice as much information as a standard line chart.
  • A long black line shows that sellers are in control – definitely bearish.
  • The bearish engulfing candle is reversal candle when it forms on uptrends as it triggers more sellers the next day and so forth as the trend starts to reverse into a breakdown.
  • This is also often one of the building blocks to the trading strategy which you can learn in our pro area.

The thin vertical lines above and below the body are called the wicks or shadows which represent the high and low prices of the trading session. Thanks to history having a habit of repeating itself, a number of time tested common candlestick patterns have How to Read Candlestick Charts been identified. Candlestick charts can be used to create successful and effective day trading strategies and trading decisions. A bullish engulfing pattern has a green candle engulfing the red one and signifies that bulls are taking over the market.

Bullish Harami

Whether a candlestick or bar chart is used depends on what information is needed. If the open and close prices are most important, the candlestick chart is best. If all parameters are equally important, a bar chart will best display this data. Ideally, but not necessarily, the open and close should be equal. While a doji with an equal open and close would be considered more robust, it is more important to capture the essence of the candlestick. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level.

  • Candlestick charts originated in Japan in the 1700s when a rice farmer noticed that the rice market and price were heavily influenced by the emotions of traders.
  • Simple trading guide and a trading strategy built around a reliable candlestick pattern can get you started off on the right foot when it comes to forecasting price movements.
  • Candlesticks patterns visually provide a clear and easy set of patterns that are highly accurate.
  • Inflation can have a big impact on the stock market, leaving unprepared investors in for a bumpy ride.
  • Candlestick patterns are useful for trading any market – but they’re particularly prized by forex traders, who often want to find trades quickly using technical analysis.

They tell you where sentiment on a market might be headed, which you can use to predict where price will go next. The only difference between bar charts and candlestick charts is how they display price information. Both are chart types that tell you a market’s open, close, high and low in a period, but they do so in slightly different ways.

Evening Star

If you are looking at a bullish reversal pattern, then the prior trend should be bearish. Consider making Candlestick patterns an essential component of your trading system. As with all trading tools, attain firsthand knowledge and experience by tracking and following them on a regular basis so you can spot them quickly. Candlesticks are building blocks for technical analysis and strategy development. High is the highest trade price for the candlestick period and is also displayed as a wick, which is a vertical line. These patterns are common and reliable examples of bullish two-day trend continuation patterns in an uptrend. A depth chart is the graph of all the pending orders for a particular asset.

What do the wicks on candlestick charts mean?

As shown in the graphic below, the top wick of a candlestick indicates the highest price reached during the time period (eg, a day). The bottom wick shows the lowest price. The “candle” part of the chart shows the opening and closing prices for the time period.

Charts are used to identify and analyze price support and resistance levels, trends, and historical patterns. There are various types of charts that can be used to interpret the action.

Bullish candle

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How to Read Candlestick Charts

An advantage of candlestick charts is they efficiently give a lot of information, making it easy to recognize patterns. The long, thin wicks of the candlestick extend from a wide section known as the real body. The real body represents the price range between the open and close of that time period’s trading. When the real body has a black or red fill, it means the close was lower than the open. If the real body is empty or green, it means the close was higher than the open.

Charts Candlestick Charts

The next candlestick has a long white body which closes in the top half of the body of the first candlestick. Engulfing patterns are the simplest reversal signals, where the body of the second candlestick ‘engulfs’ the first.

They should be preceded by at least three consecutive lower low candles. Hammers reflect a capitulation selling climax as the last hold-outs decided to exit their shares in a panic. This may trigger buyers to come back into the stock lifting the price back up very close to or above the opening price.