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How To Read Candlestick Charts?

BitForex Editor
Oct 26, 2020

The idea of using candlestick charts is a very welcomed one among traders as it helps to interpret trading signals easily. This chart which is very different from the regular bar chart has a unique design that makes it readable to as many that understand the components that form it. So, even if you are new to the system of trading, you will catch up easily using the candlestick chart to forecast the changes in the market.

What is the Candlestick Chart?

The candlestick chart does not consist of just one candlestick but different candles that stand individually to make up the chart. As earlier said, it is used majorly by traders to interpret the price actions during trading. On every candle in the chart, there is a point that indicates where the price opens, close and there are also points on the stick that shows the high price and low point from time to time.

For instance, if you choose a time frame of 1 minute on the chart, different candles will pop up for that specific period. Those candles would have two distinct colors of either red/ black or green/blue depending on how you set your charts. These two colored candles have a different meaning to understanding the trends(buying and selling) in the market and also trends in forex trading. So, when you set the time frame, a fresh candlestick will be generated with a new open and close price. This is just a surface explanation but to understand the way it works more plainly, you would first need to know what price points are.

Price Points

The simple definition of price points is that they are points on a single candle in a candlestick chart that indicates different prices. If you get all that each price points mean, it would be easier to read a candlestick chart anytime.   

Open price

This is the price point that shows the initial price that was used to trade at the beginning of a new candlestick. It could be the bottom or the top of a stick which depends on how the market moved. If the market moved higher the open price will be at the bottom and the color of the candle will be blue/green. But if the trend is otherwise, the open price will be at the top and the color will be red/black. So, the open price is not fixed to a particular side of the candle but swaps depending on the current trends showing on the chart. Also, note that the color variation is dependent on the type of setting your chart is working with of which you can change from time to time.

Close price

Just like the open price is the first price that is used for trading, the close price is the last price traded within a candlestick arrangement. This price also is seen on the top or bottom of the candlestick depending on the color at the end. If it is red, the close price will be at the bottom and the opposite applies when it is green or blue.  When the set time for the candlestick elapses, another new formation starts with a set of close and open prices and colors in the chart.

High price

In one candlestick, there could be a wick(shadow) at the top that either protrudes slightly or more. If the wick is on the candle, the tip of that wick is the high price point. However, it doesn't always happen that way because the wick could be absent sometimes. If this is the case, the high price will be said to be equivalent to the open price or close price depending on the color of the candle at that time.

Low price

Low price is the price at the tip of the wick seen at the bottom of the candlestick. If there is no wick at the bottom of a stick, the open price or close price will pass for the low price. In this case, that candle is called a bullish candle. 

Having read so much about price points and the components of an individual candlestick, it is time to get started on how to read candlestick charts.

How To Read Candlestick Charts

There are different ways candlestick charts can be read but two general ways are formations of candles and price pattern approach. Both ways are straightforward and you will understand how in a few paragraphs.

Formation Of Candles Approach

Different candlesticks combine to form a trend that when understood, trading will be more profitable at that period. Out of the many formations that candles can form are a hammer, hanging man, and shooting star formation. These three appearances will show the trend and where the trade is likely to move towards. It could be a continuation or reversal of trend depending on how the candlestick appears.

For instance, if you have a formation that has a blue candlestick with a longer bottom wick coupled with a small body there is a high tendency that the price will decline. From this trend, careful observers can then push the price up by looking at the signal formed there which is a bullish signal. You will understand this better with bullish reversal patterns. Candle formation in this example will favor traders because losses will be limited and profit is more certain.

Price Pattern Recognition Approach

For this approach, you will be studying patterns of different prices. There are so many pattern prices to consider such as the bullish engulfing pattern, bearish engulfing pattern, and triangle patterns. These patterns will see as good signals to know when to come into the market and when to stop trading.

A good example of a pattern recognition approach will be two candlesticks with the red one at the left and the right one being a blue candle. If the red looks like it wiped out all the red candles coming from the right, that pattern is bullish. A good move will be to place a stop-loss just right after the blue candle folds up because that's when the price pattern is the best.

Conclusion 

So you see, with either the candlestick formation or the price patterns, you can always get to read any candlestick chart. Besides, make sure you consider the time you are trading because it matters a lot. Also, price action and patterns should not be overlooked. If you can successfully take note of these, you will trade safely with tangible profits.

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