Being able to read a candlestick chart is a largely underrated advantage for both traders and investors. In this article on how to read candlestick charts we will be going through the following:

  • What is a candlestick chart?
  • Reading a candle on a candlestick chart
  • Candlestick charts vs bar charts
  • How to read a candlestick chart
  • Final remarks

A quick synopsis of the article in reading candlestick charts:

  • Understanding candlestick charts and what they indicate is pivotal to being able to apply them to chart analysis and trading or investing.
  • Candlestick charts represent a very clear vision in what is happening in the markets, making them appealing to traders.
  • Candlestick charts are different from other charts you can find.

What is a candlestick chart?

As redundant as it may sound a candlestick chart is a financial asset chart that displays the price (y-axis) vs the time horizon (x-axis) in terms of candlestick bars. Traders and investors use this type of chart to understand market structure better and anticipate potential moves in the financial asset.

The break down of the candlestick price action is:

  • Finding the open for a period
  • Finding the close for a period
  • The highs and lows for a period

Market structure is the basis of technical analysis which gives traders an edge in anticipating where markets may be trending or reversing. A single candle can be interpreted to be a continuation or reversal candle and completely fail. However, there are some patterns of clusters of many candlesticks can indicator a certain trend or reversal.

A single candle represents a timeframe chosen that can be changed. The most common timeframe is a daily candlestick. Each candle representing a day. Traders often look at intraday candles, 1-hour and so on to day trade. While investors may look at the larger timeframe, like a weekly candlestick.

The candlestick visualizes the open, close, high and low for the selected timeframe. A daily candlestick depicts the open of the day, the close of the day, the high and the low for that day. All of these aspects can help a market participant anticipate a potential market move.

Reading candles

The image below is a visual representation of a candlestick, no matter the timeframe. The candlestick has three main components to it, the open, close and extended wicks.

The open and close of a candlestick can be considered the main components because that is where the financial asset opens and closes for a given timeframe. This constructs the body of the candle. If the candlesticks in the image below are representative of a daily timeframe and each represents one day of price action. The open level is the open for that day and the close is the price at which the day ends on the closing bell. While the wicks above and below are the high and low moves of that session, or day.

How to Read Candlestick Charts

In analyzing the candlestick further, we must look at the following information in depth:

Open: The open is where the financial asset opens during the selected session. It will either be at the bottom or top of a candle depending on the day. If the price begins to move up from the open the candle will begin to turn green. The candle will turn red if the price begins to move down from the candle open. The candle can shift color throughout the session until the close.

High price: The upper wick of the candle is the high movement of the day. This indicates the highest price printed on that financial asset for the session. An upper wick does not have to appear on all candle. This simply means that the highest price was closing or open price.

Low price: The lower wick, just like the upper wick is one of the extremes of the session. It indicates the lowest price printed for that candle’s session. It doesn’t have to print, just like the upper wick. No bottom wick suggests the open or the close was the extreme bottom for that session.

Close price: This is the last price that was traded in the session. Whether it’s the day, hour or week. When a new candle forms, the previous candle has to close. If the closing price is above the open, the candle will be green (up day). If the closing price is below the open, the candle will be red (down day). The colours depend on chart settings.

The candle wick: The wick is the extreme of the day. It is either at the top or the bottom of the candle and the length can vary. It is sometimes referred to as the shadow of the candle. The wick helps traders identify the strength of the session. An extended wick on a small body for example means that the candle that formed is in control. If a green candle with a very long wick formed the buyers would be in control.  

Range: The range is the difference between the lowest and high point of the session. This is important to note. The wider ranges depict more volatile session and could mean those financial assets are more volatile.

Candle stick charts vs bar charts

Traders have a general preference when it comes to charting. The most similar chart to the candlestick is the bar chart.

The only difference is visual. The candlestick is fuller, while the bar chart is very slender. The open/close is less pronounced in the bar chart. It comes down to person preference, one is not extremely advantageous over the other.

How to read the candlestick chart?

Market Structure is the corner stone to reading candlestick charts. Identifying highs and lows and following the trend continuation. A chart timeframe should be set to what you plan on holding the trade for. Reading patterns within the candlestick chart will help market participants identify market trends and reversals.

The market structure or price action is king when reading the candlestick chart. A bull trend involves higher highs and higher lows. A bear trend involves lower highs and lower lows.

There are certain candlestick patterns that indicate a higher probability for a trend move or reversal. At the end of the day, one should follow the market structure trend along with the candlestick patterns.

Candlestick charts like the following depict a bull trending market. Higher highs and higher lows, as long as the retrace low doesn’t extend lower than the previous low the up trend is expected to continue. The underlying financial asset in question should print a new high as another condition. Long wicked candles at the bottom of structure confirm to an extent the continuation of the move.

Final remarks

Candlestick charts are easy to read when you understand the basics. They are the basis for all traders and some investors that want a grasp on the technical aspect of a company. The candlestick chart represents the market structure of a stock that should hold or potentially reverse. This presents traders with trading and investing opportunities.