How to read candlestick chart: introduction to patterns and formations

candlestick

 
Have you opened one of the analysis programs and you just stand in front of candlestick chart without knowing what all the candles and formations mean? Then you came to the right place, take your seat lesson about candlestick is just about to start!
 

Learning how to read from a candlestick chart is one of the basic tasks in technical analysis no matter whether you trade forex, binary options or any other financial instrument. The first thing which can pop up in your head when you look at the chart can be, what each candle means. And there is very easy and sophisticated answer for that: „moment of price in a certain period of time“.

When we use charts we have to set time frame, which is a time period which will each candle represents. So in case, we select the time frame of 5 minutes, then one candle will speak for 5 minutes of moments on the market. Pretty logical, am I right? The time frame can be selected from a period of 1 minute to 5 minutes, 30 minutes,1 hour or even a year. So if you see on your chart 30 candles it means you are looking at the last 150 minutes of price development.

So if you study chart with 1hour time frame then one candle will represent 1 hour and will tell you following:
candlestick

  • Where the price was at the beginning of the hour (bearish (red) candle has opening price on the top of the candle, bullish (green) candle has opening price on the bottom of the candle)
  • The lowest price which was reached during this hour
  • The highest price which was reached during this hour
  • Where the price did get at the end of the hour

Bearish and bullish candles

When it comes to candlestick charts we can either have bullish candles or bearish candles. The bullish candle represents dominance of the sellers over the buyers and indicates a growing market (usually marked by a green candle). Its opponent is the bearish candle which advocates predominance of the buyers over the sellers, that indicates a declining market (usually identified by a red candle).

types-of-candles

Forms and shapes of candles
1) A long body of candle indicates that the market is trending, by the colour of the candle we can distinguish whether the price is decreasing or increasing.
A long green body suggest that the buyers are in the majority and that price rises
a long red body indicates that the sellers are in the majority and that the price falls
2) A Short body of candle advocates that the market is currently uncertain. The more the body of the candle dwindles, the harder and more uncertain it will be to predict who currently runs the market.

3) The third and last shape which can candle shift to is a candle without a body, which looks just like a cross or plus symbol. In such situation, the trend is completely neutral. So neither buyers nor sellers are in the majority.

Simple example of candlestick chart

On the picture below is candlestick chart of google stock. Every candle on the graph stands for 5 minutes of moments on the market (M5). Totally we have 48 candles on the chart, which means we are looking at the activity of Apple stock of the past 240 minutes. Green candles display price growth, oppositely red candles represent price fall.

candlestick-example

Candlestick Patterns: Doji, hammer and shooting star

The introduction of candlestick forms and shapes is behind us, now we will get into candlestick patterns with which you will come very often in contact. Knowing these patterns can significantly help you to predict future shapes of the candles. The first candle, so-called Doji candle can remind you a cross or a plus symbol. We have 2 main types of doji candles. The first one indicates market indecision. The upper and lower shadows will be approximately the same length for this type of candle. You might also very often see one doji candle followed by another. Here are few examples of doji candles, which indicate market indecision.

doji-candle

The buyers and the sellers are currently in a situation where both these groups agreed upon a price, so the market is in a balance. The second type of doji candles is reversal doji candles which may look following:

types-of-doji-candle

On a bullish reversal doji candle we can see that the sellers pushed the price very low, then the buyers took over again and pushed the price back up. It may be a signal that the bulls are about to interfere because the price tried to go down, but could not stay there and so was subsequently pushed back upward. Bearish reversal doji candles, on the other hand, is a situation when the buyers got the price up and then the sellers came and got the price again back down.

Inverted hammer and shooting star

These two other types of candlestick patterns are not so different from reversal doji candles. Basically, the inverted hammer has a long lower shadow on which end is a doji candle. Oppositely the shooting star has a long upper shadow on which end is also a doji candle. They may look as follows:

hammer-shooting-star

Conclusion

There are numbers of patterns which candlesticks take upon themselves, so don’t be caught off guard when you see some of them which you haven’t seen before. Each candlestick patterns represent different reliable signals for trade. For more information about candlesticks charts check out our website every once in awhile, where we will gradually explain all formations and patterns of candles.



Michael
Author: Michael
Hi, I'm Michael and my area of expertise is forex and binary options trading. I specialize in technical analysis, namely in chart pattern setups. I educate traders of all levels and I believe that prerequisite to successful active trading is always knowing risks of the game. My most current interest lays in cryptocurrencies, especially in Ethereum and in decentralized applications. I do not give investment advice, but for general inquiries please use the comment section under any article.

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