How to Read a Candlestick Chart

However, before you can read and explain a candlestick chart, you must understand what it is and become comfortable identifying and using candlesticks patterns. It is important to understand how to read candlestick charts and what the different components of a candle are. If you want to learn how to apply candlestick chart analysis to your trading strategy, this article covers all the basics to help you get there.

• This action is reflected by a long red (black) real body engulfing a small green (white) real body.
• Exinity Limited is a member of Financial Commission, an international organization engaged in a resolution of disputes within the financial services industry in the Forex market.
• Some traders prefer to see the thickness of the real bodies, while others prefer the clean look of bar charts.
• For example, groups of candlesticks can form patterns throughout forex charts and diagrams that could indicate reversals or continuation of trends.
• Candlestick chart analysis depends on your preferred trading strategy and time-frame.

DailyFX Limited is not responsible for any trading decisions taken by persons not intended to view this material. For example, in the image below we have the bullish engulfing price pattern. The bullish engulfing is a combination of a red candle and a blue candle that ‘engulfs’ the entire red candle. It is an indication that it could be the end of a currency pairs established weakness. A trader would take advantage of this by entering a long position after the blue candle closes.

Candlestick Charting For Dummies

Candlesticks can help traders keep our eye on market momentum and away from the static of price extremes. There are three specific points (open, close, wicks) used in the creation of a price candle. The first points to consider are the candles’ open and close prices. These points identify where the price of an asset begins and concludes for a selected period and will construct the body of a candle. Each candle depicts the price movement for a certain period that you choose when you look at the chart.

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• Some forex traders might focus on taking advantage of candle formations, while others attempt to spot price patterns.
• These points identify where the price of an asset begins and concludes for a selected period and will construct the body of a candle.
• The lower chart uses colored bars, while the upper uses colored candlesticks.
• In order to read a candlestick chart, figure out what each different part of a candlestick tells you then study the different shapes to learn about market trends.
• Take-profits should be placed in such a way as to ensure a positive risk-reward ratio.

Also, the bars on the bar chart make it difficult to visualize which direction the price moved. It covers the latest investing technology, cryptocurrency, and today’s somewhat-less-predictable market environment. No single candlestick pattern is considered the most accurate, as its accuracy depends on factors such as market conditions and timeframe. Different patterns can provide insights into market trends, but they should be analyzed alongside other technical indicators for informed trading decisions.

Candlestick Components

Because the bullish and bearish pressures in the market have reached equilibrium. Since these forces on the price are roughly equal, it is likely that the previous trend will end. This situation could bring about a market reversal, which is a price move contrary to the preceding trend. In the GBP/JPY daily chart below, we can see that the GBPJPY price was bouncing around a strong support level, but failed to break below it. It penetrated the support level on the third try, but the market swiftly reversed and formed an Engulfing Bullish Candlestick pattern that signaled further bullishness in the market. This is followed by three small real bodies that make upward progress but stay within the range of the first big down day.

Here are two common examples of bearish three-day trend reversal patterns. These are a couple of the most common bearish three-day trend reversal patterns. Here are a couple common bullish three-day trend reversal patterns. These candlesticks for dummies figures shows some of the most common and reliable types of bearish two-day trend reversal patterns in an uptrend. When the market consolidates for a while, it is basically setting up to break out in one direction or the other.

Types of Candlestick Patterns

We’ll show you where to find these charts (online or in your favorite investing app), what they mean, and how to dig out valuable information. Then, you’ll be ready to buy and sell with newfound stock market savvy. This is the Dummies guide for beginner and intermediate investors who want to make smarter decisions with a better understanding of how to read candlestick charts. We’ll show you where to find these charts (online or in your favorite investing app), what they mean, and how to dig out valuable information. Then, you’ll be ready to buy and sell with newfound stock market savvy. Traders often rely on Japanese candlestick charts to observe the price action of financial assets.

This action is reflected by a long red (black) real body engulfing a small green (white) real body. The pattern indicates that sellers are back in control and that the price could continue to decline. The above chart shows the same exchange-traded fund (ETF) over the same time period.

Considering Charting Methods and the Role of Candlesticks

This information is made available for informational purposes only. It is not a solicitation or a recommendation to trade derivatives contracts or securities and should not be construed or interpreted as financial advice. Any examples given are provided for illustrative purposes only and no representation is being made that any person will, or is likely to, achieve profits or losses similar to those examples.

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. It is identified by the last candle in the pattern opening below the previous day’s small real body.

They consist of a random candle and another bigger candle that fully encompasses or engulfs the price action contained within the first. These charts are a few of the most common and reliable bullish two-day trend reversal patterns in an uptrend. The best way to get comfortable with using candlesticks in your trading is to open a demo account and start practicing applying your knowledge. As soon as you get comfortable enough in reading candlestick charts for trading, you can open a live account and use your experience to improve your trading performance in the long run. As you learn to identify and read simple and more complex candlestick patterns, you can begin to read charts to see how you can trade using these patterns. ​An engulfing pattern on the bullish side of the market takes place when buyers outpace sellers.

In order to read a candlestick chart, figure out what each different part of a candlestick tells you then study the different shapes to learn about market trends. This cheat sheet shows you how to read the data that makes up a candlestick chart, figure out how to analyze a candlestick chart, and identify some common candlestick patterns. Price action can give traders of all financial markets clues to trend and reversals.

As with the hammer formation, a trader would place a stop loss below the bullish engulfing pattern, ensuring a tight stop loss. For more forex candlestick charts check our forex candlesticks guide where we go in depth into the advantages of candlestick charts as well as the strategies that can be implemented using them. Candlestick chart analysis depends on your preferred trading strategy and time-frame. Some strategies attempt to take advantage of candle formations while others attempt to recognize price patterns. A candlestick chart is simply a chart composed of individual candles, which traders use to understand price action. Candlestick price action involves pinpointing where the price opened for a period, where the price closed for a period, as well as the price highs and lows for a specific period.

Recognizing candlestick chart patterns is the first step toward understanding this useful and popular method of analyzing market price action. If you know what these patterns could mean and what signals they generate, it’ll help you build a more advanced trading strategy. In fact, candlestick charts had been used for centuries before the West developed the bar and point-and-figure charts we know and use today.

It consists of a bearish candle followed by a bullish candle that engulfs the first candle. A bearish candlestick forms when the price opens at a certain level and closes at a lower price. The default color of the bearish Japanese candle is red, but black is also popular.