If you’re interested in trading financial markets, particularly in stocks, forex, or cryptocurrency, you might have come across candlestick charts. Candlestick charts are used to analyze and track the price movements of an asset over time. This chart type is popular among traders because it provides a lot of information about an asset’s price in a visually appealing way. However, reading candlestick charts can be confusing for beginners. In this article, we will explain the basics of how to read a candlestick chart.
What is a Candlestick Chart?
A candlestick chart is a chart that shows the price movements of an asset over a specific period. Each candlestick on the chart represents a unit of time, such as a day, a week, or an hour. The body of the candlestick represents the opening and closing prices of the asset for that period, while the shadows or wicks represent the high and low prices for that period.
Reading the Body of a Candlestick
The body of a candlestick represents the opening and closing prices of an asset for a given period. If the body is green or white, it means that the asset’s closing price is higher than its opening price, indicating that there was a price increase during that period. Conversely, if the body is red or black, it means that the asset’s closing price is lower than its opening price, indicating that there was a price decrease during that period.
For example, in the image below, the first candlestick has a green body, indicating that the asset’s price increased during that period.
Reading the Shadows or Wicks of a Candlestick
The shadows or wicks of a candlestick represent the high and low prices of an asset during a given period. The upper shadow represents the highest price reached during that period, while the lower shadow represents the lowest price reached during that period.
For example, in the image below, the second candlestick has a long upper shadow, indicating that the asset’s price reached a high level during that period but then fell back down. The long lower shadow, on the other hand, indicates that the asset’s price reached a low level but then rose back up.
Reading Candlestick Patterns
While each candlestick provides valuable information about an asset’s price movements, it’s often more useful to analyze a series of candlesticks to identify patterns. Candlestick patterns are formations made by multiple candlesticks that can indicate a potential price movement in the future.
One of the most popular candlestick patterns is the “hammer,” which appears when a candlestick has a long lower shadow and a small body. This pattern indicates that the asset’s price fell sharply during that period but then rebounded, and it can be an indication of a potential price increase in the future.
Another common candlestick pattern is the “doji,” which occurs when a candlestick has a very small body with upper and lower shadows of similar length. This pattern suggests that the asset’s price did not change much during that period and can be an indication of a potential price reversal.
It’s important to note that while candlestick patterns can be useful in predicting future price movements, they are not always accurate. Therefore, it’s essential to use other technical indicators and fundamental analysis to make informed trading decisions.