How To Read A Yardstick

- Reviewed by James Stanley, Dec. xv, 2021

Reading candlestick charts – Talking points:

Candlestick charts differ greatly from the traditional bar chart
Traders more often than not prefer using candlestick charts for twenty-four hours-trading because they offer an enjoyable visual perception of toll
It'south important to empathise the key components of a candle, and what they point, to apply candlestick chart assay to a trading strategy

What is a candlestick chart?

A candlestick chart is only a nautical chart composed of private candles, which traders use to understand price activity. Candlestick price action involves pinpointing where the price opened for a menstruation, where the price airtight for a catamenia, besides as the cost highs and lows for a specific menstruation.

Price activeness can give traders of all financial markets clues to trend and reversals. For instance, groups of candlesticks can form patterns which occur throughout forex charts that could bespeak reversals or continuation of trends. Candlesticks can also class individual formations which could indicate buy or sell entries in the market.

The period that each candle depicts depends on the fourth dimension-frame chosen by the trader. A pop time-frame is the daily fourth dimension-frame, so the candle will draw the open, close, and high and low for the day. The dissimilar components of a candle tin help yous forecast where the toll might become, for instance if a candle closes far below its open it may betoken further toll declines.

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Interpreting a candle on a candlestick chart

The image below represents the design of a typical candlestick. There are three specific points (open, close, wicks) used in the creation of a price candle. The showtime points to consider are the candles' open and close prices. These points place where the price of an nugget begins and concludes for a selected catamenia and will construct the trunk of a candle. Each candle depicts the price movement for a certain menstruum that you choose when you look at the chart. If y'all are looking at a daily chart each individual candle volition display the open, close, upper and lower wick of that day.

A red and a blue candlestick with open and close wicks

Open price:

The open up price depicts the first toll traded during the formation of the new candle. If the price starts to trend upwards the candle will plough green/blue (colors vary depending on chart settings). If the price declines the candle will turn red.

High Price:

The top of the upper wick/shadow indicates the highest price traded during the period. If at that place is no upper wick/shadow it ways that the open price or the close price was the highest price traded.

Low Price:

The lowest price traded is the either the toll at the bottom of the lower wick/shadow and if there is no lower wick/shadow then the lowest price traded is the same equally the close price or open up price in a bullish candle.

Shut Cost:

The close price is the last price traded during the menstruum of the candle germination. If the close price is beneath the open up price the candle will turn red equally a default in most charting packages. If the close price is in a higher place the open toll the candle will be green/blueish (also depends on the nautical chart settings).

The Wick:

The adjacent important element of a candlestick is the wick, which is also referred to as a 'shadow'. These points are vital as they show the extremes in price for a specific charting period. The wicks are chop-chop identifiable every bit they are visually thinner than the body of the candlestick. This is where the strength of candlesticks becomes apparent. Candlesticks can aid traders keep our middle on market momentum and abroad from the static of toll extremes.

Direction:

The management of the price is indicated by the color of the candlestick. If the price of the candle is closing above the opening price of the candle, then the price is moving upwards and the candle would be green (the color of the candle depends on the chart settings). If the candle is ruby, and so the price closed below the open.

Range:

The difference between the highest and lowest price of a candle is its range. You lot can calculate this past taking the price at the top of the upper wick and subtracting it from the price at the lesser of the lower wick. (Range = highest signal – everyman point).

Having this cognition of a candle, and what the points indicate, means traders using a candlestick chart take a clear reward when information technology comes to distinguishing trendlines, price patterns and Elliot waves.

Bar Chart vs Candlestick Chart

Every bit you can see from the epitome beneath, candlestick charts offer a singled-out advantage over bar charts. Bar charts are not as visual equally candle charts and nor are the candle formations or price patterns. Besides, the bars on the bar chart make it difficult to visualize which direction the price moved.

Difference between bar chart and candle chart

How to read a candlestick chart

There are various ways to employ and read a candlestick nautical chart. Candlestick chart analysis depends on your preferred trading strategy and time-frame. Some strategies endeavour to take advantage of candle formations while others endeavour to recognize cost patterns.

Interpreting single candle formations

Individual candlesticks can offer a lot of insight into current market sentiment. Candlesticks like the Hammer , shooting star , and hanging man, offer clues every bit to changing momentum and potentially where the market prices maytrend.

Equally yous can come across from the image below the Hammer candlestick formation sometimes indicates a reversal in trend. The hammer candle germination has a long lower wick with a modest body. Its closing pricing is higher up its opening price. The intuition behind the hammer formation is simple, cost tried to decline but buyers entered the market pushing the price up. It is a bullish signal to enter the marketplace, tighten stop-losses or close out a brusk position.

Traders tin can take reward of hammer formations by executing a long merchandise in one case the hammer candle has airtight. Hammer candles are advantageous because traders tin implement 'tight' stop-losses (stop-losses that risk a small-scale amount of pips). Take-profits should be placed in such a way as to ensure a positive risk-reward ratio. And then, the accept-profit is larger than the finish-loss.

Recognizing cost patterns in multiple candles

Candlestick charts help traders recognize cost patterns that occur in the charts. By recognizing these price patterns, like the bullish engulfing design or triangle patterns you can accept reward of them past using them as entries into or get out signals out the market.

For instance, in the image below we accept the bullish engulfing cost pattern. The bullish engulfing is a combination of a red candle and a blue candle that 'engulfs' the entire red candle. Information technology is an indication that information technology could exist the terminate of a currency pairs established weakness. A trader would take advantage of this past entering a long position subsequently the bluish candle closes. Remember, the cost pattern only forms once the second candle closes.

As with the hammer germination, a trader would place a terminate loss below the bullish engulfing pattern, ensuring a tight stop loss. The trader would and then set a take-profit. For more than 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 tin can be implemented using them.

Further tips for reading candlestick charts

When reading candlestick charts, be mindful of:

The fourth dimension frames of trading.
Classic price patterns.
Price action.

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