Easy Ways to Read a Candlestick Chart: 12 Steps with Pictures

How to Read Candlestick Charts

Candlesticks still offer valuable information on the relative positions of the open, high, low and close. However, the trading activity that forms a particular candlestick can vary. Small candlesticks indicate that neither team could move the ball and prices finished about where they started. The close is the last price traded during the candlestick, indicated by either the top or bottom of the body. Price is king but what does it take to trade price action successfully and why do so many traders… But are reversal trading strategies really inferior, riskier and should be avoided? Price is king but what does it take to trade price action successfully and why do so many traders struggle with it?

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.

The Japanese market watchers who used this style referred to the wick-like lines as “shadows.” Reversal patterns.When the direction of a prevailing trend changes from an uptrend to a downtrend , or vice versa, it’s known as a trend reversal. Reversal patterns include the doji, reversal hammer, bullish engulfing reversal, and the morning star reversal. The third and the seventh example in figure 10 show such candlesticks. The shadow indicates that although the price has tried to move in a certain direction, the opposition of market players has strongly pushed the price in the other direction. This is an important behaviour pattern which we will analyse in detail later. The candlesticks are color-codedto illustrate the direction of the price action movements.

What is the benefit of a candlestick chart?

They often follow or completedoji, hammer or gravestone patterns and signal reversal in the short-term trend. The advantage of candlestick charts is the ability to highlight trend weakness and reversal signals that may not How to Read Candlestick Charts be apparent on a normal bar chart. This is a topping pattern, where the last candle opens below the previous day’s small real body. The final candle closes deeply in the real body of the candle from two days previously.

The buyers have tried to move the price up, while the sellers have pushed the price down. However, the price has ultimately returned to the starting point. Sideways phasesand turning pointsare usually characterised by candlesticks that have a long shadow and only short bodies. This means that there is a relative balance between the buyers and the sellers and there is uncertainty about the direction of the next price movement. Look for a short body with a long bottom wick to spot a possible reverse in downtrend. These are called “hammers” because the wick looks like the handle and the body looks like the head of the hammer. Hammers indicate a possible reversal in a downtrend, especially when seen next to at least 1 week of candlesticks that show the market going down.

Do you need special software to read candlestick charts?

They are only useful in combination with insights (e.g., if a company introduces a potentially successful product, then its stocks are likely to rise). However, no matter how well you prepare, it is still possible to lose some or all of your investment. As a rule, candlestick patterns show the battle between bullish markets and bearish markets over a period of time. In order to understand the wide variety of candlestick patterns, you need to understand a few basic definitions. Traders care about candlestick patterns because they are believed to indicate future price movements. Candlestick patterns are the most interesting and simple way of predicting the prices for creating your unique trading strategies. With a candlesticks pattern, you can successfully read the changes in the market without letting emotions come in the way.

Which candlestick pattern is most reliable?

Two of the most reliable candlestick patterns are the Morning Star (bullish reversal pattern) and Evening Star (bearish reversal pattern) indicators. They rely on three days’ worth of pricing to identify a trend that may signal a reversal. Engulfing patterns (bearish or bullish) are also fairly reliable since they compare two-day trends.

A slight variation of this pattern is when the second day gaps up slightly following the first long up day. Everything else about the pattern is the same; it just looks a little different. The fourth candle opens higher than the high of the third candle and closes lower than any of the lows of https://www.bigshotrading.info/ the earlier 3 candles. The fourth candle opens lower than the low of the third and closes higher than any of the highs of the earlier three candles. One can learn about Candlesticks and with some effort, one can memorise Candlestick Patterns quickly and apply this knowledge in a short time.

Introduction to Candlesticks

A candlestick that forms within the real body of the previous candlestick is in Harami position. Harami means pregnant in Japanese; appropriately, the second candlestick is nestled inside the first.

  • The doji candlestick occurs when the open and closing price are equal.
  • ​An engulfing pattern on the bullish side of the market takes place when buyers outpace sellers.
  • This is also a weaker reversal signal than the Morning or Evening Star.
  • As the name suggests, a candlestick chart is made up of so-called candlesticks.
  • Some beginner traders may recognize the bullish setup and enter a buy order at this point.

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