Let’s go over some of the basics, so that you can start using this information in your trading strategies. You should have a better understanding of how to use candlestick charts in your analysis process.
What candlestick chart is?
A candlestick chart is a powerful technical analysis tool used by traders in all markets – from crypto to stocks – in order to predict prices and make smarter trading decisions.
It is a type of visual aid that can be used to identify trends in certain stocks. The information from an individual stock shapes the chart by combining:
- the open price (the first trade of the day);
- high and low prices (the best and worst performed trades of the day);
- closing price (last trade of the day).
The range between these values is highlighted by a vertical line called the ‘body’, while two thin lines, called ‘shadows’ or ‘wings’, show the highest and lowest points reached over that period.
The body typically signifies whether prices went up or down as its color fills depend on market direction – red for negative and green for positive.
Each point is represented by a rectangle or “candle” that has two different sections:
- the upper section is the trading range between the highest and lowest points
- the lower section indicates how it finished after all the data was collected.
How to read candlestick charts
The chart provides a visual representation of a particular stock’s performance, allowing traders to make informed decisions.
Candlesticks don’t predict future prices, but they can be helpful in determining whether the market sentiment is bullish or bearish, so traders should handpick the pattern that works best for them. Interpreting strong signals from high-probability setups will increase the likelihood of success, and researching past performance will help traders find the ones that work consistently over time.
Gaining a comprehensive understanding of candlestick charting is relatively straightforward: if the candlestick bars are green with small or no wicks on either end, it signals positive developments in the financial sector. A red bar with longer wicks suggests negative momentum for a stock.
Using candlestick charts: examples and strategies
One of the most important strategies for using candlestick charts is researching patterns. Many traders rely on recognizable trends in order to make better predictions about a security’s future price movement.
Additionally, understanding resistance and support lines is beneficial for determining reversal points or predicting potential breakout levels.
Let’s give an example of a pattern: a Doji candlestick can indicate a reversal or strong directional move. Other popular signals include the Inverted Hammer and Shooting Star formations, both of which can be used to detect reversals or corrections to an established trend.
With careful analysis of candlestick formations, traders can more accurately assess stock prices to make informed decisions and maximize potential profits.
Disclaimer: these articles are for educational purposes only. Market analysis, prices, news, trade ideas, or any other information within this site or the chatroom is not investment advice.