Candlestick charts remain popular among traders due to the vast amount of trading information they provide, as well as the design that makes them easy to read and interpret.
Opening Price
The top or bottom of the candlestick’s body indicates the opening price, depending on whether the asset is moving up or down during the five-minute timeframe. If the price is trending upwards and closes above the opening, the opening is represented by the bottom of the body, and the close is represented by the top. If the price is trending downwards and closes below the opening, the opening is represented as the top part of the candlestick (except for the doji candle) and the close is represented as the bottom part. Candles that close higher are often filled in green or white. Candles that close lower are often filled in black or red.
Highest Price
The highest price during the candlestick period is represented by the top part of the upper shadow or wick above the body. If either the opening or closing is the highest price, there will be no upper shadow.
Lowest Price
The lowest price is represented by the bottom part of the lower shadow or wick below the body. If either the opening or closing is the lowest price, there will be no lower shadow.
Closing Price
The close is represented by the last price traded during the candlestick period and is depicted either by the top part (for green or white candles) or the bottom part (for red or black candles) of the body.
Price Trend
You can determine the price trend during the candlestick period by its color and positioning. If the candle is green, the price closed above the opening price and will be positioned above and to the right of the previous candle, unless it is shorter and a different color than the previous candle. If the candle is red, the price closed below the opening price and will be placed below and to the right of the previous candle, unless it is shorter and a different color than the previous candle.
Price Range
The distance between the highest upper shadow and the lowest lower shadow is the price range in which the asset moved during the candlestick period. The range is calculated by subtracting the lowest price from the highest price.
Interpreting Patterns
You can practice reading candlestick charts by opening a demo trading account or playing with candles on free online charting platforms. Set the chart type to candlesticks and select a one-minute timeframe so you can view several candles.
Once you understand what each candle indicates, you can start looking for trading opportunities based on candle patterns, such as the Three Black Crows and the Abandoned Baby.
Frequently Asked Questions (FAQs)
What is the benefit of candlestick charts?
Candlestick charts provide traders with an easy way to track the price movement of a particular security over a specific period. Traders can see where the security opened and closed, as well as the high and low during the period, and make trading decisions accordingly.
How can candlestick charts be interpreted?
Once you become familiar with what the basic components of a candlestick chart mean, you can start looking for different patterns. The different shapes and lengths of candles indicate different trends, and any trader should be aware of how to read these patterns.
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Sources:
– Northwestern University. “Financial Toolbox: Candlestick Chart”
– Gunduz Caginalp and Henry Laurent. “The Predictive Power of Price Patterns,” Pages 184-185. Applied Mathematical Finance, 1998.
– University of Pennsylvania. “Plot Candlestick Chart”
– The Data Visualization Catalogue. “Candlestick Chart”
– Grace College. “Identifying Market Trends: How to Read Candlestick Charts”
Source:
https://www.thebalancemoney.com/how-to-read-a-candlestick-chart-1031115
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