Numerous chart types and their variations exist, but here we’ll cover the three main types to give you the very basic on how to read trading charts. Check out our trading service to learn more about how to read trading charts with different trading styles. Ross Cameron’s experience with trading is not typical, nor is the experience of traders featured in testimonials.

peaks and valleys

While the real body is often considered the most important segment of the candlestick, there is also substantial information from the length and position of the shadows. For instance, a tall upper shadow shows the market rejected higher prices while a long lower shadow typifies a market that has tested and rejected lower prices. Candlestick charts will often provide reversal signals earlier, or not even available with traditional bar charting techniques. Even more valuably, candlestick charts are an excellent method to help you preserve your trading capital. This benefit alone is incredibly important in today’s volatile environment.

Learn all the basics of candlestick charts here – including how to read them, some key candlestick patterns and more.

Moreover, they can provide useful information like the market sentiment, or possible reversals in the selected markets, by demonstrating the price move in a particular manner. Understanding this is a good starting point in terms of how to use candlestick charts in trading. Many candlestick patterns rely on price gaps as an integral part of their signaling power, and those gaps should be noted in all cases. As for FX candles, one needs to use a little imagination to spot a potential candlestick signal that may not exactly meet the traditional candlestick pattern. For example, in the figure below taken from an FX chart, the bearish engulfing line’s body does not exactly engulf the previous day’s body, but the upper wick does. With a little imagination, you’ll be able to spot certain patterns, although they might not be textbook in their formation.

The image below represents the price action data on a higher and relatively lower time frame. The candlestick to the right represents one days’ worth of price action. Candlesticks like this represent a period of indecision from buyers and sellers as there is no clear direction for price. However, an indecision candlestick can also suggest a pause in a price trend before a continuation or the start of a potential reversal. The hammer candlestick pattern is formed of a short body with a long lower wick and is found at the bottom of a downward trend.


The genuine https://business-oppurtunities.com/ of an inverted hammer candle is tiny, with a prolonged top wick and little or no bottom wick. It emerges at the bottom of a downtrend and typically indicates the possibility of a bullish reversal. The unique three rivers pattern is believed to be a bullish reversal pattern, but it behaves more like a bearish continuation pattern on performance tests.

They could provide valuable information about market sentiment and potential price movements when interpreted correctly. After you become familiar with what the basic components of the candlestick chart mean, you can begin to look for various patterns. Different shapes and lengths of candles signify different trends, and any trader should be familiar with how to read these patterns. Each candlestick pattern has a specific interpretation that reflects the attitude of market participants. The patterns can also provide trading signals since traders are human beings who tend to act similarly in the same situations. As an asset’s price is plotted over time using Japanese candlesticks, they form a Japanese candlestick chart of many candlesticks.

This is not so much a pattern to act on, but it could be one to watch. If the price continues higher afterward, all may still be well with the uptrend, but a down candle following this pattern indicates a further slide. Candlesticks show that emotion by visually representing the size of price moves with different colors. Traders use the candlesticks to make trading decisions based on regularly occurring patterns that help forecast the short-term direction of the price.

How to read a candlestick chart

which specific criminal justice degree do i need candlestick chart analysis, so called because the candlestick lines resemble candles, have been refined by generations of use in the Far East. Candlestick charts are now used internationally by swing traders, day traders, investors and premier financial institutions. People can set the color of the candlestick according to their personal preferences with the help of trading software. Logically, if the candlestick is bullish, then the opening price is most often at the bottom, and the closing price is nearly always at the top. If the candlestick is bearish, the opening price is invariably at the top, and the closing price is always at the bottom. As specified earlier, candlesticks are a way of presenting the price action over an established period of time.

  • This group of candlestick patterns shows that buyers and sellers are equally strong, so the price tends to close near its open.
  • Let the market do its thing, and you will eventually get a high-probability candlestick signal.
  • The closing price is always the lower part of the candle’s base for a filled Candlestick.
  • Patterns are extremely helpful when it comes to trading penny stocks along with large cap stocks.
  • As you can see from the image below, candlestick charts offer a distinct advantage over bar charts.

As mentioned before, reading charts is not an exact science, and you can’t focus on just one signal. Candlestick patterns can be helpful, but they need to be read in conjunction with other indicators. Here are some of the most widely used indicators in technical analysis. If an asset has been dropping for some time, a wedge pattern can pop up as it makes its final downward move. This falling wedge pattern is used as a signal of a bullish reveal.

Morning and Evening Star Candlestick Patterns

But most traders call them candlesticks, or just candles, for short. It emerges during positive periods and typically indicates a reversal to the negative. A bullish candle initiates the pattern, which is followed by a minor bearish or bullish candle.

This will also provide you with a better idea of the current price trend. Reading a series of candlesticks together is like reading a sentence. Now let me explain how to read forex charts given this data. Currency price movements are segmented in to time intervals and each interval has four data points. Patterns are extremely helpful when it comes to trading penny stocks along with large cap stocks.

There is another similar pattern, known as the inverted hammer. As well as a usual hammer it has a small body, however, it stands out with a long upper wick. The inverted hammer is also usually found at the end of a downtrend and is considered a potential bullish reversal indicator. Some investors get sufficient trading information from analyzing candle formation while others look for various chart patterns. Now that you know how to read a candlestick, let’s take a look at some of the most common and useful bullish and bearish patterns. Candlestick charts can be used to trade a wide variety of securities, including stocks, futures, CFDs, and forex pairs.

inverted hammer

Here are some tips on how to read candlesticks without memorizing patterns one by one. Candlesticks are very easy to interpret and even an amateur can easily figure out how the price has moved. The colored bodies of the candlesticks make them easily visible, so a trader can see the price direction at once. It is important to pay attention to the bigger picture and read candlestick patterns with context.

Bullish reversal patterns

If the close price is below the open price the candle will turn red as a default in most charting packages. If the close price is above the open price the candle will be green/blue . The period that each candle depicts depends on the time-frame chosen by the trader. A popular time-frame is the daily time-frame, so the candle will depict the open, close, and high and low for the day.

Reading what happened previously or the back story up to the current candlestick can potentially provide the clues about what might happen next. When you can string enough sentences together, you might be able to understand the story. This is achieved by analysing larger samples of historical data.

Key takeaways when learning how to read a candlestick chart effectively

A stock chart is a graph that displays the price of an investment over a period of time. Now we understand the basics about how the main investment charts work and the data they include, we are ready to dig deeper into how you can use them to inform your trades. Candlestick patterns are technical trading tools that have been used for centuries to predict price direction.