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How to Read a Candlestick Chart

Learn how to read that Bitcoin chart

Photo by Austin Distel on unsplash.com
Photo by Austin Distel on unsplash.com

Candlestick is probably one of the most common charts used to analyse insights for decision making when trading. Usually traders prefer candlestick chart over other forms such as a bar chart, as the former offers a better and clearer visual perception of the price change over a time window.

Candlestick charts are seen almost everywhere due to the increasing popularity of cryptocurrencies and stock trading. In this article, we are going to explore the key components of a candlestick chart and what they indicate. Additionally, we are going to discuss how to read such charts and how you can use this information for your benefit.

What is a candlestick chart?

Candlestick charts are commonly used to represent the price movements of currencies, securities and derivatives. The analysis of such charts can help traders unveil trading patterns that can be analysed to empower decision making.

A candlestick chart comes with four data points. High and Low prices depict the highest and lowest prices within the specified time range. Opening and Closing prices indicate the first and last prices respectively.

Elements of a candlestick
Elements of a candlestick

Now the wide box of the of the figure above is called body and it represents the price range between opening and closing prices. If the latter is higher former than the open price, the body is empty (candlestick on the left). If opening price is higher than the closing price the body is filled. The thin lines represent the high and low prices and called the upper and lower shadows. You will see across the web that a shadow is also commonly referred to as the wick.

In most trading tools, it is way more common to use colouring. So instead of having bodies which are either filled or empty in order to indicate the movement and direction of the price, we instead use green (or blue) colour to show that the closing price is higher than the opening price. On the other hand, we usually use red colour to indicate that the price of the asset has fallen within the specified time window.

Coloured version of candlesticks
Coloured version of candlesticks

How to read a candlestick chart?

Even though the previous figures illustrate candlesticks with bodies and shadows of even length, this isn’t normally the case. The length of these components denote specific pieces of information that can help readers recognise patterns and use them as indicators for entering or exiting the market.

Short vs Long Bodies

As we already pointed out, the body of a candlestick illustrates the price range between the closing and opening price.

The longer the green (or empty) candlestick is, the greater the difference between the closing and opening price. Essentially, this indicates that there was a strong buying pressure and the price has increased significantly. Likewise, a long red (or filled) candlestick body indicates that there’s a selling pressure. The longer the body is, the greater the decline of the price is.

Long vs Short candlestick bodies
Long vs Short candlestick bodies

Short vs Long shadows

Like candlestick bodies, the length of the shadows can also vary depending on the full price range of the asset within the specified time frame. Recall that the upper and lower shadows indicate the highest and lowest prices the currency has reached respectively.

The length of the shadow indicates how big the difference is between highest or lower and opening or closing prices. To be precise, the length of the head (upper shadow) is defined to be the difference between the highest price in the trading session and the maximum of the opening and closing prices (depending on the body’s colour). Likewise, the tail (lower shadow) is the difference between the lowest price and the minimum of closing and opening prices.

Conclusion

In this article we explored the components of a candlestick chart and how one can read and analyse it in order to infer insights about price movements and patterns that one can take advantage of.

If you are Investing your money into stocks and cryptocurrencies it is quite important to understand how to read a candlestick as this will help you make better decisions when trading. Candlesticks are probably one of the most informative charts one can use to empower decision making.

A single candlestick comes with four distinct data points: the high and low prices as well as the close and open prices. Additionally, there are certain components that help us derive useful information. These are the body and the shadows of the chart. By looking at a single candlestick, one can infer the direction and the price range of the asset of interest.


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