As a cross between a line chart and a bar graph, candlestick charts provide more information than most standard financial charts. Very helpful for identifying whether the buyers or the sellers are controlling the market at any given time, candlestick charts are one of the best financial charts for investors. Using them can help you to make more accurate predictions about the price movements of assets that you wish to trade.
Candlestick Charts: What They Are and How to Read Them
When you see a candlestick chart, you can see instantly why it gets its name–the charts are composed of rectangular blocks with thin bars at the top and bottom, making them look like candles. These candles are placed on a chart that looks similar to the type used for line graphs. To read them, you need to examine:
The bars are the outlined or shaded rectangular part of a candlestick chart. The bar tells you if the stock finished out above or below the selling price that it opened with. Usually, red bars indicate that the asset closed at a lower price than its opening price, while green bars mean that the asset closed the trading day at a higher price than its opening price. The size of the bar indicates how much the price of the asset moved from open to close on a trading day. Longer candles are a sign that there was greater buying or selling pressure on the trading period. Each bar represents the stock price for a specific period, such as one day, one hour or one 15-minute increment.
Also called the shadows, the wicks are the narrow lines that stick out of the top and bottom of the candlestick chart. The top wick shows you the highest price that an asset traded at during the time period represented, while the bottom wick indicates the lowest traded price. When you see a long wick, you know that there was a shift in behavior, such as a sudden selloff, spike in price or slowing of trading.
Using Candlestick Charts on Trading
Candlestick charts can be used to predict future market behavior. By identifying signs known as financial indicators, you can decide if it’s best to buy or sell a stock. Known as price action trading, this strategy is frequently recommended by experts to beginners to trading.
The following chart patterns and terms can help you begin to spot trends in the market. The best way to familiarize yourself with them is to spend time studying candlestick charts and using demo accounts to experiment with making trades based on the data that they provide. Keep in mind that this is a very pared down list; there are many other chart indicators that can be gleaned from studying candlestick charts.
What It Is: Engulfing is when you see a candle with a small bar and then a candle that is larger on both ends next to it. In other words, the second candle engulfs the first one.
What It Means: Seeing engulfing at the top of a trend can indicate a bullish market. At the bottom of a trend, it may indicate a bearish market.
What It Is: A doji is a single candle that has hardly any change between the opening and closing prices, making it look like a cross on the chart.
What It Means: Dojis show that investors were hesitant to buy or sell a particular asset and that there may be a major trend in price on the way.
What It Is: A morning star is a candle with a short body placed between two longer candles at the bottom of a trend downwards.
What It Means: A morning star is an indicator that the market is becoming bullish.
What It Is: A shooting star is a short candle with a long wick that is found above a longer candle at the top of a trend upwards.
What It Means: A shooting star is an indicator that the market is becoming bearish.
What It Is: A hammer is a candlestick chart with a very long lower wick and a small square box at the top, giving it a hammer shape.
What It Means: A hammer indicates that the price of a stock fell rapidly after the opening of the trading period but then rallied to finish above the lowest price.
What It Is: A reverse hammer has a very long higher wick with a small square box at the bottom, resembling an upside down hammer.
What It Means: A reverse hammer indicates that the price of a stock rose rapidly after the opening of the trading period but then slumped to finish well below the highest price.
What It Is: A spinning top is a candle that has long wicks on both the top and bottom and a short bar in between, making it look like a child’s spinning top toy.
What It Means: Normally, a spinning top means that there is uncertainty in how the price of an asset will move.