How To Read a Candlestick Chart

However, they should be looked at in the context of the market structure as opposed to individually. For example, a long white candle is likely to have more significance if it forms at a major price support level. Long black/red candlesticks indicate there is significant selling pressure.

• The candlesticks trace their origin to Japan, hence their original name, Japanese candlesticks.
• After a long downtrend, long black candlestick, or at support, focus turns to the evidence of buying pressure and a potential bullish reversal.
• Price charts visualize the trading activity that takes place during a single trading period (whether it’s five minutes, 30 minutes, one day, and so on).
• Candlestick charts can be read at a glance, offering a simple representation of price action.
• There are many short-term trading strategies based on candlestick patterns.

However, the trading activity that forms a particular candlestick can vary. There are several different types of price charts traders can use to navigate the markets and an endless combination of indicators and methods with which to trade them. To answer these questions, technical traders typically use multiple indicators in combination. Within a stock chart, certain repeatable patterns may appear that can provide clues to help determine where a new trend begins and ends. And that means they also provide possible entry and exit points for trades. It’s important to understand support and resistance are merely psychological levels, but they can nevertheless be useful for traders who are developing a trading plan.

What is a candlestick chart?

These basic candlestick patterns occur during a downward trend, consisting of a red (or black) candle and a doji next to it. Technical analysis in trading trends treats the bullish harami cross the same way as the bullish harami, foreshadowing a potential upwards (bullish) trend. A bullish pattern occurs when the price closes at a higher point than it opened, indicating that the value of the stock or security has increased over time. The most common color of bullish candlesticks is green, but white is also sometimes used to show a bullish candlestick chart.

The lower chart uses colored bars, while the upper uses colored candlesticks. Some traders prefer to see the thickness of the real bodies, while others prefer the clean look of bar charts. Traders often rely on Japanese candlestick charts to observe the price action of financial assets. Candlestick graphs give twice as much information as a standard line chart. They also allow you to interpret stock price data in a more advanced way and to look for distinct patterns that provide clear trading signals. There are two pairs of single candlestick reversal patterns made up of a small real body, one long shadow, and one short or non-existent shadow.

Candlestick Positioning

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social https://www.bigshotrading.info/ Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading. Note that these colors may vary from one trading platform to another. Crew believes there are three key aspects to successful candlestick reading.

Candlestick Color Shows Direction

By now, you can agree with us that learning how to read candlesticks isn’t as complex as you thought. However, this isn’t everything about trading in the currency markets. There’s much to learn and implement before you become a professional at the art. Engulfing candlesticks indicates an end to a previously dominant trend. It consists of two candlesticks, in which the current candle prolongs enough to immerse the previous one. On the other hand, a gravestone doji’s upper wick is longer than the body, indicating a rush of the bulls.

• In a normal bull market, there might be more clusters of green candles than red candles, while the reverse is true for a bear market.
• If the price starts to trend upwards the candle will turn green/blue (colors vary depending on chart settings).
• This indicates that prices advanced significantly from open to close and buyers were aggressive.
• It may seem like a reversal, but the bulls still dominate the market in reality.

Upper shadows represent the session high and lower shadows the session low. Candlesticks with short shadows indicate that most of the trading action was confined near the open and close. Candlesticks with long shadows show that prices extended well past the open and close. As such, while the bar chart makes it look attractive to buy, the candlestick chart proves there is indeed a reason for caution about going long. Thus, by using the candlestick chart, a swing trader, day trader or even if you do active investing would likely not buy in the circled area. Recognizing candlestick chart patterns is the first step toward understanding this useful and popular method of analyzing market price action.

Long Versus Short Shadows

The peak of the upper shadow is the high of the session and the bottom of the lower shadow is the low of the session. If you apply this methodology in the long run, you will be a winning trader. The theory is that individual indicators will provide false signals that could lead to poor entries and big losses. A more powerful system uses a combination of indicators to confirm one another. Traders stay out of potentially harmful trades more often if there are conflicting signals among indicators.

The resulting candlestick looks like an upside down “T” due to the lack of a lower shadow. Gravestone doji indicate that buyers dominated trading and drove prices higher during the session. However, by the end of the session, sellers resurfaced and pushed prices back to the opening level and the How to Read Candlestick Charts session low. Dragonfly doji form when the open, high and close are equal and the low creates a long lower shadow. The resulting candlestick looks like a “T” due to the lack of an upper shadow. Dragonfly doji indicate that sellers dominated trading and drove prices lower during the session.