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How to Read Candlestick Charts for Trading: A Beginners Guide

how to read candle bar chart

Like the hammer, an inverted hammer appears during bearish trends. Candles are constructed from four prices, specifically the open, high, low and close. They form different shapes and combinations commonly known as candlestick or candle patterns. Candle patterns can be single, double or triple patterns that consist of one, two or three candles respectively.

how to read candle bar chart

If you know what these patterns could mean and what signals they generate, it’ll help you build a more advanced trading strategy. The hammer candlestick family also consists of related single candlestick patterns. Hammers have a long upper or lower wick and a small candle body on the opposite side. Like the doji, a hammer candlestick pattern indicates that a price reversal might be on its way. Members of the hammer family of candlesticks include the following. The open is the first price traded at the beginning of the trading period.

Pattern Recognition

A downtrend is in play, and a small real body (green or white) occurs inside the large real body (red or black) of the previous day. If it is followed by another up day, more upside could be forthcoming. It is identified by the last candle in the pattern opening below the previous day’s small real body.

With bulls having established some control, the price could head higher. The above chart shows the same exchange-traded fund (ETF) over the same time period. The lower chart uses colored bars, while the upper uses colored candlesticks.

It’s worth noting that both charts are more effective when used in combination with other technical analysis indicators and patterns. Some traders get the necessary information from analyzing candle formation, while others try to spot and understand various candlestick chart patterns. However, when opting for one of these techniques, it’s crucial to ensure it complies with your trading strategy and risk management plan. Wicks, also known as shadows, are lines that protrude from the body of a candle.

The Bullish Harami Cross is similar to the Bearish Harami Cross but signals a potential bullish reversal. It’s a pattern that I often use in conjunction with other indicators for maximum effectiveness. The Bearish Harami is a two-candle pattern where a large bullish candle is followed by a smaller bearish or bullish candle within the previous candle’s body. The Bearish Engulfing pattern occurs when a small bullish candle is followed by a larger bearish candle that “engulfs” the previous one. The color of the candle body indicates whether the asset’s price increased or decreased during the period.

  1. Highlighting prices this way makes it easier for some traders to view the difference between the open and close.
  2. The bullish harami is the opposite of the upside-down bearish harami.
  3. This pattern provides investors with a sign of market indecision.
  4. The Bearish Evening Star is a three-candle pattern that signals a potential reversal from a bullish trend to a bearish trend.
  5. It consists of a bearish candle followed by a bullish candle that engulfs the first candle.

That’s what I help my students do every day — scanning the market, outlining trading plans, and answering any questions that come up. There are a ton of ways to build day trading careers… But all of them start with the basics. Candlestick charts are popular for several reasons, including their visual clarity and the comprehensive information they provide. The Bearish Falling Three is the opposite of the Bullish Rising Three.

Bearish Falling Three

A candlestick has a body and shadows, sometimes called the candle and wicks. The wicks are an asset’s high and low price, and the top and bottom of the candle are the open and close price. Candlestick charts can be used to trade a wide variety of securities, including stocks, futures, CFDs, and forex pairs. They could provide valuable information about market sentiment and potential price movements when interpreted correctly.

Thus, the open and the close price of such a candle will stand for the prices of the beginning and the end of this 15-minute trading period. Their creation as a charting tool is often credited to a Japanese rice trader called Homma. His ideas were likely what provided the foundation for what is now used as the modern candlestick chart. Homma’s findings were refined by many, most notably by Charles Dow, one of the fathers of modern technical analysis. The bullish harami is the opposite of the upside-down bearish harami.

how to read candle bar chart

Even though the pattern shows us that the price has been falling for three straight days, a new low is not seen, and the bull traders prepare for the next move up. If you apply this methodology in the long run, you will be a winning trader. The hanging man looks the same as the hammer, but it appears during bullish trends and suggests that a correction to the downside might soon materialize. StocksToTrade in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, StocksToTrade accepts no liability whatsoever for any direct or consequential loss arising from any use of this information.

What Is the Best Color Candle for a Chart?

Just above and below the real body are often seen the vertical lines called shadows (sometimes referred to as wicks). Events such as earnings reports or geopolitical occurrences can have an immediate effect on candlestick patterns. They often disrupt the relationship between supply and demand, impacting the support and resistance level of stock prices. The best color for a candle on a chart is subjective and depends on personal preference.

However, the most commonly used colors are green for bullish candles and red for bearish candles, as they are easily distinguishable. As mentioned earlier, the historical relevance of candlestick charts adds an extra layer of trustworthiness to this method of analysis. If you’d like to learn more about reading a candlestick chart, check out our in-depth interview with Andrew Lokenauth. Each candlestick provides investors with a considerable amount of trading information. Let’s have a look at how to read the main features and components of this technical tool.

Leverage TrendSpider

Bullish patterns like the Morning Star or Hammer indicate potential upward movement. These are patterns you want to look for during a downtrend as they can signal a reversal. 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.

Reading the Parts of a Candlestick

Conversely, a green-colored body means that the close price was over the open price.Traders should also pay attention to the size of a real body. A long-bodied candlestick denotes a strong trend in either direction while a short body indicates little price action or a possible reversal. Candlesticks with no bodies at all are called dojis and are often considered by traders as a sign of market indecision or a potential change in the trend direction. Apart from the price action during a certain time frame, candlestick charts could offer much more useful information, especially if traders know how to correctly interpret it.

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