Candlestick Charts Explained

Candlestick charts create formations and patterns (such as those shown in chart patterns page) that are a type of stock market technical analysis, and are used in stock chart displays. They are able to be used on every time frame, and are utilized by long term investors, swing traders, and day traders. The major benefit of candlestick charts is that they are great at providing you with key points in the market, and when used properly, can substantially decrease your exposure to risk. Trading blindly is no way to trade. Many are able to read patterns and single candles to sway odds in their favor of what will soon follow via pattern recognition.

It is even believed by many traders that the news is already worked into the charts. Essentially, news is the justification to the average trader or investor of why the move on the chart just occurred. The end conclusion being that you can, in many circumstances, expect news events (whether positive or negative) based on chart movements and patterns.

Japanese Candlestick Charts Explained

“Japanese Candlestick” charts, named for their resemblance to candles, have been refined after several generations of use in Asia. Today, candlestick charts are used internationally by day traders, swing traders, investors and even Wall Street financial institutions.

Candlestick charts are fairly easy to understand. Anyone from a new trader that is just being introduced to technical analysis, to the seasoned veteran trader can easily use the power of these candles. Candlestick charts provide open prices, closing prices, highs, lows, and can be early indications of turning points in the market.

Any technical tool you use can be applied to a candlestick chart. Unlike traditional bar charts and line charts, candlestick charts give you trading and timing benefits not otherwise available with other charts. Candlestick charts can be used in all markets from the stock market, futures, commodities, forex and can be a powerful tool when trading options. As a result, the average technical analysis driven trader will much prefer candlestick charts when performing technical analysis.

Chart Candles

The wide part of the candlestick (or the body) of the candle, represents the range between the opening and closing prices of the session (on the daily chart). Same goes for any other time range.

candlestick charting explained - candlestick chartingIf the closing price ends lower than the price at open, the body of the candle is red or black. The body is white or green should the closing price ends higher than the opening price.

The lines above and/or below the body of the candle are referred to as shadows or wicks. The top of the upper wick shows us the high of the day, while the bottom wick shows us the low of the day.

The color of the candle, and the length of the body shows whether bulls or bears were controlling price action within that time period.

Trading Candlestick Charts

A very powerful benefit of using candlestick charts is that the color and size of the candles can provide some valuable information. A few examples:

  • candlestick charting explained - dojisLong green or white candle body confirms bullish action
  • Long red or black candle body confirms bearish action
  • A small candle body (any color) indicates indecision, a time when price is chopping in a tight range, as bullish and bearish traders are in a battle of tug of war
  • As the candle body gets smaller, we essentially end up with a “doji,” a candlestick line that has an identical opening and closing price, and therefore has no candle body.

While the candle body is typically considered to be the most important part of the candlestick, you are also able to gain a substantial amount of information from the position and length of the wicks. For example, a tall wick above the body shows that the market tested and rejected higher prices with selling pressure, while a long wick under the body indicates a market that has tested and rejected lower prices with buying pressure. Candlestick charts will usually provide reversal signals, which traditional bar and line charting techniques are unable to show.

Here are a few examples of how using candlestick charts can help to anticipate developing or future price action shown on the S&P futures daily chart:

As you can see, large red bars indicate bearish action, and are typically part of a larger bearish move. Tall lower wicks indicate buying pressure, a point at which the market may pivot and go the other way. Large green bars indication bullish action, and are typically part of a larger bullish move, while tall upper wicks indicate selling pressure, and a point at which the market may pivot and go lower.

Conclusion

Without a doubt, candlestick charts are the option to go when it comes to displaying financial charts. The information given by the simple displays are so much more than you get from other types of bars, and makes analyzing a chart that much easier to understand.

Some of the best display options available today for traders and investors is found on the TradingView platform. I’ve used it for years, and recommend it to all of my members and trading colleagues. I definitely recommend checking it out!

I hope you found this information to be helpful.

Candlestick Charts Explained – Reading Price Action

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