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How To Read Candlesticks: A Complete Beginner’s Guide To

Reading and Interpreting Candlestick Charts
⋮ 15/11/2021

From forex to indices, treasuries, commodities, and stock markets, technical traders prefer candlesticks
for day-trading over the other options due to their comprehensive visual presentation of price and
ease of interpretation.

If you’re venturing into any of these fields for the first time, it’s no surprise that you’re wondering what a
candlestick is and the relationship it has with currency markets. While it may sound like rocket science,
candlestick charts are the best option for tracking price patterns and most straightforward to interpret if
you have the basic knowledge.

However, some traders still find bar charts more straightforward to use than candlesticks. Thus, you may
want to try both, especially if you’re a beginner, and see what works best for you. Still, understanding how
candlesticks work is an excellent idea and will hasten your decision-making process. This article gives
you a complete guide into how candlesticks work, how to read candlesticks and everything else you
need to know as a trader.

What Is a Candlestick?
A candlestick is a famous chart made of individual candles traders use to interpret price movements on
an asset’s money market. They are more common during technical analysis.

The candlesticks illustrate where the price opened, closed, and the value ranges for the specific period.
These price actions inform traders of the continuation of trends and reversals in the chart.

The candlesticks, sometimes called candles, occasionally cluster to form patterns throughout an entire
chart to indicate continuation in trading trends or reversals. Similarly, the specific candles can also help
you notice when to take action and what move to make.

For example, the bullish candles can help you determine if it’s time to initiate long trades, while bearish
candlestick patterns may indicate short trade sessions.

The candlesticks trace their origin to Japan, hence their original name, Japanese candlesticks.
However, as days evolved, traders began to call them candlesticks or simply candles.

Why Are Candlesticks Different From Straight Line Charts?

Candlesticks operate in almost a similar way as the traditional bar charts. They also display price in the
vertical (x) axis and time in the horizontal (y) axis and show the market’s open, close, low, and high
prices.

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However, their presentation of results is quite distinct, and they offer more insights than the traditional
charts.

For instance, bar charts have no bodies or wicks and display price action using notches on straight lines.

On the other hand, candlesticks contain bodies and wicks, which indicate when prices open, close, and
the highest and lowest price ranges during a session.

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Interpreting the Basic Components of a Candlestick
So, how do you learn how to read candlesticks?

A typical candlestick has two main components, the body, and the wick. The body indicates the open and
close prices of an asset in a given period.

However, the wicks show the price ranges. Thus, they show traders when the price reached its highest
and lowest peaks.

Traders can then use the direction of the body movements and patterns that the candlesticks form to
technically analyze the preceding trend of the market.

This data can tell if the price will probably rise, drop, or maintain over a specific time frame. Here are
some essential components and functionalities of a candlestick.

The Body

The body of a candlestick is the main section of the candle. It’s typically wider and comes in different
colors, depending on your setting preferences and market trends.

The green candle, sometimes blue or white (depending on your chart settings), indicates a bullish trend.
Its lowest part indicates the opening price of the market, while the top shows the closing price. Similarly,
the blue (or green) candle shows a rise in price over the specified period.

However, a red candle, sometimes black, indicates a bearish trend. In this case, the highest part of the
candle shows the opening price, while the lowest part is the closing value. Thus, a red candle indicates a
decline in price over the specified time.

A candlestick may sometimes have a longer or shorter body. A longer body indicates a strong trend with
an extensive gain or loss. However, the candle body remains shorter if the opening and closing prices are
almost equal. In this case, the bulls and bears are probably terminating each other.

The Wick

The wick, also referred to as the shadow, is an essential part of candlestick interpretation. Their primary
responsibility is to show the extremes in the price ranges of an asset during the time frame.

The upper wick, protruding at the top part of the candle, indicates the highest price range during the time.
On the other hand, the lower wick, also called the tail, protruding from the bottom of the candle indicates
the lowest point the prices got during the market session.

The upper and lower wicks maintain their functions, whether on a green or red candle. However, some
candles may sometimes not have the wick on them. In this case, we can say the closing and opening
prices were also the lowest and highest points prices hit during the market session.

Again, a long wick shows a high or low spike in prices, followed by a reversal before the session’s
closure.

Time

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Every candlestick on a chart presents the results of a session over a specific time frame. Most
candlestick charts let you choose the duration in settings. For example, you can record price action
hourly.

Thus, every single candlestick will show you the behavior of a market after every one hour. In such a
case, you may end up with 24 candlesticks in your chart (if the chart works 24-hours) daily.

Similarly, you can set daily recordings. Thus, you’ll have a single candlestick tracking market behavior
daily for a specific period, let’s say one month.

However, some candlestick charts come with automated time-frames, say six hours, daily, or hourly.

Price

Open price

The open price shows the first value traded when a new candle forms. Depending on your settings, the
candle will turn white, green, or blue if the price starts an upward trend. However, a decline in the price
will make the candle red or black.

Close Price

The close price indicates the last price traded over the entire duration of the candle formation. The candle
typically turns blue if the last price is above the open price to show a rise. On the flip side, a red candle
indicates the last price is lower than the opening price (a decline).

High Price

The tip of the upper shadow (wick) indicates the highest prices got during the session (high price). If the
candle has no upper wick, the open price (bullish candlestick) or close price (bearish candlestick)
indicates the high price of the session.

Low Price

Like high price, the low price is the value that appears at the bottom tip of a wick or the session’s close
(bearish) or open (bullish) price.

Price Range

The price range is the variation between the lowest and highest prices on a candle. It could be negative
if the price declined or positive if there was a rise in market movement.

To calculate the price range, you subtract the values at the lowest tip of the wick from those of the
highest, or close price minus open price if there’s no wick.

That is Range= highest price – lowest price, or range= open price-close price.

Direction

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The direction of price in a candlestick depends on the color of the candle. For instance, you notice a rise
in price if the candle closes above the open price and turns green.

However, a red candle indicates when the closing price is below the open price, which indicates a decline
during the market session. In other words:

A green candle (sometimes white or blue) indicates a rise in price over the market session, while
A red candle (sometimes black) shows a price drop.

Interpreting Price Patterns in a Candlestick

To analyze market price actions, you need to observe two candle sections, the body, and wick. A single
candlestick formation can offer different clues to the market behavior and help in making trading
decisions.

For example, candles like shooting stars, hammers, or hanging men can help you tell if the market may
change momentum and the trends to expect at the prices. A hammer formation, for instance, indicates a
price push-up after an attempt to decline.

As such, you can take advantage of the trend to tighten your stop-losses. On the other hand, bullish
engulfing (triangle patterns) can be good pointers to help you decide the best time to debut or exit a
market. Here are some of the most common candlestick patterns to look out for.

Doji

Doji candlesticks typically contain longer wicks with shorter-to non-existent bodies, resulting in a candle
that looks more like a plus sign. They indicate high volatility in the market that closed almost where it
started.

Doji is a Japanese word for error. According to the Japanese traders, there’s no way a market can open
and close at almost the same price unless an error occurs during the session.

Doji can occur in three primary forms. The dragonfly doji is when the lower wick is longer, indicating a
bear rush wrapped close to the starting price.

On the other hand, a gravestone doji’s upper wick is longer than the body, indicating a rush of the bulls.

Similarly, there’s the long-legged doji, which has long upper and lower wicks. In this case, the session
experienced almost a similar high and low but ended at the same spot it began.

The best way to trade a doji depends on the activities that it precedes. For example, a dragonfly doji that
occurs after a prolonged downtrend may mean a reversal in the downward action.

Hammers and Hanging Men

Hammers, like dragonfly doji, have longer wicks with missing or more minor upper shadows but broader
bodies. They typically appear to indicate an almost ending bear trend.

If the hammers form at the end of an uptrend, they indicate buyers cannot control the market after a
notable sell-off, and the trend is almost ending.

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Hanging men is the bullish form of hammer formations.

Engulfing Candlesticks

Engulfing candlesticks indicates an end to a previously dominant trend. It consists of two candlesticks,
in which the current candle prolongs enough to immerse the previous one.

A bearish engulfing is where a huge red candle follows and covers a green one, indicating bears
dominating the market. On the other hand, a bullish engulfing is the direct opposite and ends the bear
market.

Rising and Falling Three

Rising and falling three are patterns to show a pause in a market trend. For example, a bullish rising
three depicts a long green candle preceded by three smaller falling ones and a long green candlestick
again. It may seem like a reversal, but the bulls still dominate the market in reality.

On the other hand, a bearish market consists of a long red candlestick followed by three smaller rising
candles and another long red at the end to indicate the resumption of a bearish market. For affectivity, the
three falling or rising candlesticks should drop or climb within the length of the bigger one, followed by a
taller different color to indicate resumption of the predominant market.

Inverted Hammer

An inverted hammer appears when a candle has a longer upper wick than the lower one. It shows a
buying preceded by a selling pressure that wasn’t strong enough to lower the market price.

Morning Star

A morning star serves as a ray of hope in an austere market downtrend. It’s a three-stick pattern,
consisting of one short-bodied candle sandwiched between a long green and a long red candle. A
morning star typically shows a subsiding selling pressure of a day, followed by a looming bull market.

Shooting Star

A shooting star is almost similar to the inverted hammer, with a long upper wick and small lower body,
and forms in an uptrend.

In this case, the market breaks a bit higher during the opening and rallies to an all-time high during the
mid-session before closing slightly over the open price. The trend resembles a falling star, hence its
name.

Wrap Up
By now, you can agree with us that learning how to read candlesticks isn’t as complex as you thought.
However, this isn’t everything about trading in the currency markets. There’s much to learn and
implement before you become a professional at the art.

Thus, we suggest that you get an expert to help you navigate the process and develop your skills until
you get better at the game.

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