What Is the Candlestick Chart And How To Read It

A Candlestick Chart is a financial chart used to depict the price movements of securities, derivatives, or currencies. Each “candlestick” visually represents the open, high, low, and close prices (OHLC) for a specific period. These periods can range from minutes to months, depending on the chart’s timeframe. 

The main body of the candlestick shows the opening and closing prices, while the lines (or “wicks”) extending from the top and bottom indicate the highest and lowest prices during the period. A candlestick is colored to reflect the market’s direction: typically, a filled or darker color indicates a closing price lower than the opening (bearish), while a light or hollow candlestick shows that the closing was higher (bullish). This graphical representation offers traders at all levels a detailed view of market sentiment and potential price movements.

Our guide will help you understand candlestick charts and how to read them effectively, providing a solid foundation for beginners looking to enhance their technical analysis skills. Also, we’ll disclose a few of the top brokers for utilizing candlestick charts.

What Is the Candlestick Chart and How to Read It
Key Facts Candlesticks
  • Candlestick charts visually represent price movements, displaying open, high, low, and close prices (OHLC) for various timeframes.
  • They offer detailed views of market sentiment; a filled (bearish) or hollow (bullish) candlestick indicates the closing price’s direction relative to the opening price.
  • Key to interpreting candlestick patterns is understanding bullish and bearish candles, indicating buying pressure or selling pressure, respectively.
  • Timeframes in candlestick charts range from minutes to months, impacting analysis.
  • Candlestick patterns, like Hammer, Inverted Hammer, Bullish and Bearish Engulfing, Doji, Morning Star, and Evening Star, signal potential market reversals.
  • Brokers like RoboForex, Vantage Markets, and FP Markets offer advanced candlestick charting tools and educational resources for effective market analysis.

Pros and Cons of Candlesticks

ProsCons
✅ Data charts provide comprehensive data visualization❌ Can be a steep learning curve for beginners as they need to remember the multiple candlestick patterns and their interpretations
✅ Offers market sentiment insights❌ Patterns do not guarantee how the market will move
✅ Available to use across multiple markets❌ Relying on candlesticks alone is not effective and should be combined with other indicators
✅ Helps spot profitable opportunities ❌ Learning how to use candlesticks is a time-consuming process
✅ Traders can identify market trends based on specific candlestick patterns❌ Candlestick patterns can lag, signaling reversals or trends only after they have begun
✅ Candlesticks are one of the easier charts to use for pattern recognition ❌ Can sometimes produce false signals
✅ Candlestick charts can be combined with other technical analysis tools❌ The sheer volume of information in candlestick charts can be overwhelming
✅ Immediate feedback on price action❌ A candlestick pattern might seem perfectly formed on one timeframe but can also appear completely opposite on another, making it difficult to trust the signal 100%
✅ Helps with risk management as you can spot continuations or potential reversal points❌ Limited to price data as candlestick charts only show fluctuating asset prices
✅ Available on most trading platforms❌ Candlestick charts can be noisy and difficult to read in volatile markets

How to Interpret a Candlestick

Interpreting candlestick patterns is fundamental in technical analysis, providing insights into market sentiment and potential price movements. Each candlestick’s shape and color indicate the market’s behavior during a given timeframe, allowing traders to make informed decisions. Here, we’ll break down the interpretation into two main types: Bullish and Bearish candles.

Bullish Candle

Bullish Candles – source: TradingView

A Bullish Candle occurs when the closing price is higher than the opening price, often indicating buying pressure and a potential upward movement in price. Characteristics of a bullish candle include:

  • Color: Typically colored in white, green, or unfilled, signaling that the closing was higher than the opening.
  • Shape: A longer body indicates strong buying pressure, whereas a shorter body suggests a weaker bullish sentiment.
  • Wick: A short upper wick may indicate minimal selling pressure during the period, while a long lower wick signifies that buyers overcame sellers after a period of selling pressure.

Bearish Candle

Bearish Candles – source: TradingView

Conversely, a Bearish Candle is formed when the closing price is lower than the opening price, often signaling selling pressure and a potential downward movement in price. Features of a bearish candle include:

  • Color: Typically colored in black or red, indicating that the closing was lower than the opening.
  • Shape: A longer body in a bearish candle reflects strong selling pressure. A short body, however, may indicate a weaker bearish sentiment.
  • Wick: A long upper wick can suggest that sellers managed to push the price down from its high during the period, while a short lower wick indicates minimal buying pressure.

How to Read Candlesticks

Candlestick charts are more than just simple visual aids for traders; they are comprehensive tools that encapsulate the market’s movements and sentiments within specific timeframes. The key to interpreting these trading charts lies in understanding the relationship between the opening and closing prices, as represented by the body of the candlestick, and the highs and lows of the trading period, indicated by the wicks. 

A candlestick that closes higher than its opening price suggests a bullish market for that period, usually marked by a lighter color. Conversely, if the candlestick closes lower, it indicates a bearish market, typically shown in a darker color. This color coding simplifies the identification of market trends, allowing traders to make informed decisions quickly.

Candlesticks

The analysis goes deeper when considering the size of the candlestick’s body and wicks. A long body represents a strong market move where the closing price is far from the opening price, highlighting significant buying or selling pressure. 

On the other hand, a short body with long wicks points to a period of indecision, where the difference between the opening and closing prices is minimal despite wider price movements during the session. This distinction between strong and weak market momentum is crucial for predicting future market behavior.

Effective candlestick reading requires not just an examination of individual candlesticks but also an understanding of their patterns over time. Certain formations, like the “doji” or “hammer,” can indicate potential market reversals or confirmations of current trends. However, it’s essential to contextualize these patterns within broader market conditions and alongside other technical indicators for a more accurate analysis.

Using Timeframes in the Candlestick Charts

Timeframes play a crucial role in candlestick charting, affecting the interpretation and applicability of observed patterns. Each candlestick represents trading activity over a specific period, such as 1 minute, 1 hour, or 1 day. Here’s how different timeframes impact your analysis:

  • Short-Term Timeframes: Ideal for day traders or those looking for quick entry and exit points. Patterns in these timeframes may signal immediate market reactions, but they can also be more prone to noise and false signals.
  • Medium-Term Timeframes: Often used by swing traders, medium-term timeframes balance the detail of short-term movements with broader market trends, offering a clearer view of potential direction changes.
  • Long-Term Timeframes: Preferred by investors holding positions for weeks, months, or even years. Long-term candlestick patterns provide insights into the market’s overall direction and are less affected by daily fluctuations.
Candlestick Timeframes – source: TradingView

The choice of timeframe depends on your trading style, goals, and the level of market detail you need. Adjusting the timeframe of your candlestick chart can reveal different patterns and trends, allowing for analysis that suits your trading strategy.

Technical Analysis Strategies to Read Candlesticks

Candlestick charts are an important part of technical analysis, providing a rich foundation for forecasting future market movements. Here, we’ll explore strategies that leverage candlesticks to enhance trading decisions.

Price Action

Price Action refers to the strategy of making trading decisions based on the price movements of an asset rather than relying on external indicators or complex analytical tools. This approach emphasizes the importance of price changes and the formation of various candlestick shapes over time, which collectively offer clues about potential future market movements. Price action trading is rooted in the belief that prices reflect all necessary information and that historical price movements can indicate future trends.

Understanding price action within candlestick charts begins with recognizing the market’s inherent narrative told through the open, high, low, and close prices of each period. These elements reveal the intensity of buying or selling pressure, the volatility within the trading session, and the market’s decisiveness or indecisiveness regarding a specific asset. 

two examples for price action with candlesticks

For instance, a candlestick with a small body and long wicks may indicate a tug-of-war between buyers and sellers (1), with no clear victor by the close of the period. Conversely, a candlestick with a large body and short wicks suggests a strong consensus in the market direction, whether bullish or bearish (2).

Traders who specialize in price action need to develop a keen eye for these subtleties, which often require a significant amount of practice and experience. The key is not just to identify individual candles but to understand them in the context of recent market conditions and broader trends. 

This view helps traders anticipate potential price movements and make informed decisions without the need for additional indicators. It’s a skill that combines pattern recognition, a deep understanding of market psychology, and an appreciation for the broader economic landscape influencing asset prices.

Patterns

Candlestick patterns are key to unlocking insights into market psychology and potential future movements. Each pattern’s unique formation showcases potential future price movements. Here, we’ll explore four popular candlestick patterns, unpacking their significance and how traders can interpret them for informed decision-making.

Hammer and Inverted Hammer

Inverted Hammer

The Hammer and Inverted Hammer are single-candle patterns that signal potential bullish reversals after a downtrend. The Hammer has a small body at the upper end of the trading range with a long lower wick and little to no upper wick, resembling a hammer. This formation suggests that although selling pressure was present, by the end of the period, buyers managed to push the price back up, indicating potential buying interest at lower levels.

Conversely, the Inverted Hammer, also appearing after a downtrend, has a small body at the lower end with a long upper wick. This pattern implies that buyers attempted to rally the price, and despite a pullback, the closing was near the opening. The presence of these patterns suggests that the downtrend may be losing momentum, and a reversal to the upside could be imminent.

Bullish and Bearish Engulfing

Bearish Engulfing

The Engulfing patterns are two-candle formations that mark potential reversals. A Bullish Engulfing pattern occurs at the end of a downtrend and consists of a small, bearish candle completely engulfed by a larger, bullish candle. This pattern signifies that buying pressure has overtaken selling pressure, potentially leading to a trend reversal.

The Bearish Engulfing pattern is the opposite, forming at the end of an uptrend. The first candle is small and bullish, followed by a larger bearish candle that engulfs the first. This indicates that sellers have overwhelmed buyers, and a downward trend could be on the horizon.

Doji

Doji

The Doji is a single-candle pattern characterized by its small body, indicating that the opening and closing prices are virtually the same. The presence of a Doji candle suggests indecision among traders, with neither buyers nor sellers able to gain the upper hand. Depending on its context within a trend, a Doji can signal that a reversal is possible, as the previously dominant market force (bullish or bearish) is weakening.

Morning Star and Evening Star

Morning Star

The Morning Star and Evening Star patterns are three-candle formations that signal reversals. The Morning Star pattern, indicative of a bullish reversal, consists of a short-bodied candle between a long bearish candle and a long bullish candle. This pattern suggests a transition from bearish to bullish sentiment.

The Evening Star pattern, signaling a bearish reversal, features a short-bodied candle between a long bullish candle and a long bearish candle, marking the shift from bullish to bearish momentum.

Support Resistance

Support and resistance levels are fundamental concepts in technical analysis, acting as key indicators for potential price movements on candlestick charts. These levels help traders identify where the price of an asset may pause or reverse, offering insights into buying and selling opportunities.

Support Levels

Support levels indicate where the price stops falling and rebounds. On a candlestick chart, these are seen where a downtrend slows down or reverses, marked by a concentration of bullish candles or patterns signaling a shift in market sentiment. Support is like a safety net, suggesting a point where buyers are likely to step in, believing the asset is undervalued or cheap, driving the price up.

Resistance Levels

Resistance levels suggest where the price might stop rising and potentially fall. These are identified on candlestick charts where an uptrend pauses or reverses, often highlighted by a cluster of bearish candles or formations indicating selling pressure. Resistance acts as a ceiling, indicating a price level at which the market feels an asset is overvalued or too expensive, leading to selling and a potential decrease in price.

Importance in Candlestick Charts

In the context of candlestick charts, traders look for patterns that form near these levels to make informed decisions. For example, a bullish engulfing pattern forming at a support level might indicate a strong buying opportunity, suggesting that the price is likely to increase. Similarly, a bearish pattern forming at resistance could signal a good selling point, predicting a drop in price.

Resistance Level – source: TradingView

Support and resistance levels are dynamic and can change over time. What was once a resistance can become a support once it is broken, indicating a change in market sentiment. Traders use these levels in conjunction with candlestick patterns to refine their trading strategies, setting targets for entry and exit points, and managing risk.

Indicators

Indicators in technical analysis are mathematical calculations based on a security’s price and/or volume that aim to predict future price movements. When used alongside candlestick charts, these indicators can enhance the understanding of market trends, momentum, and potential reversal points. Here’s how some key indicators work well with candlestick patterns to inform trading decisions.

Moving Averages

Moving Average – source: TradingView

Moving Averages (MAs) are among the most widely used indicators, providing a smoothed line representing a security’s average price over a specific period. Traders often use MAs to determine the direction of the trend. 

For instance, when a candlestick pattern forms above a rising moving average, it might indicate a strong bullish trend, reinforcing the potential for long positions. Meanwhile, a bearish pattern forming below a declining moving average suggests a strong downtrend, potentially validating short positions.

Relative Strength Index (RSI)

Relative Strength Index (RSI) – source: TradingView

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements on a scale of 0 to 100. It is particularly useful for identifying overbought or oversold conditions. 

For example, an RSI reading above 70 indicates that a security may be overbought, while a reading below 30 suggests it could be oversold. Candlestick patterns near these extreme levels can provide insight into potential reversals, with bullish patterns near the oversold region or bearish patterns near the overbought region indicating shifts in market sentiment.

MACD (Moving Average Convergence Divergence)

MACD (Moving Average Convergence Divergence) – source: TradingView

The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. It consists of the MACD line, a signal line, and a histogram, which can indicate trend reversals, momentum, and the strength of the trend. 

Traders might look for divergence between the MACD and the price action on the candlestick chart, as it can be a strong indicator of potential bullish or bearish reversals. For instance, if the price is making new lows but the MACD is making higher lows, it suggests a bullish divergence, indicating a possible upward trend.

Using Indicators with Candlestick Charts

Integrating these indicators with candlestick charts provides a more comprehensive analysis framework, allowing traders to confirm trends and signals suggested by candlestick patterns. It’s crucial, however, to remember that no indicator is infallible. Successful traders use a combination of indicators and candlestick patterns, along with other forms of analysis, to make informed decisions.

Broker & Platforms for Candlestick Trading

To be effective at candlestick trading, you’ll need to use a broker offering this type of chart along with other essential tools. Below are three of our recommended brokers that stand out for their comprehensive candlestick chart capabilities. 

RoboForex

RoboForex broker

RoboForex is known for its exceptional candlestick charting capabilities, offering traders comprehensive tools for technical analysis. Its platform allows for detailed customization, including variable time frames and an extensive range of technical indicators specifically beneficial for analyzing candlestick patterns. The ability to annotate and draw directly on charts enhances the analysis, making it easier for traders to track trends and identify key patterns. 

RoboForex supports MetaTrader 4 and MetaTrader 5, both industry leaders in trading software known for their advanced charting features. These platforms provide a solid foundation for candlestick analysis, equipped with various tools to help traders spot opportunities and make informed decisions.

Also, the broker has R StocksTrader, which combines cutting-edge technologies and a straightforward interface to access global financial markets. This platform has advanced watchlists, leverages up to 1:20, and only requires an initial deposit of $100.

FeatureDetails
Tradable AssetsStocks, forex, ETFs, commodities, indices, futures
Number of AssetsOver 12,000
PlatformsMetaTrader 4, MetaTrader 5, R StocksTrader
Customer ServiceLive chat, email, phone
Demo AccountYes
RegulationFSC

Vantage Markets

Vantage Markets broker

Vantage Markets offers a seamless trading experience with a strong emphasis on candlestick chart analysis. The platform is designed for traders who rely on detailed market insights, providing real-time data and a comprehensive set of technical indicators to support in-depth analysis of candlestick patterns. This facilitates a more informed trading strategy, allowing traders to swiftly identify potential entry and exit points based on the evolving market sentiment. 

The support for MetaTrader 4 and MetaTrader 5 by Vantage Markets ensures that users benefit from some of the most advanced analytical tools available today. Both platforms offer exceptional charting capabilities, enhancing traders’ ability to conduct candlestick analysis effectively.

FeatureDetails
Tradable AssetsForex, indices, commodities, ETFs, bonds, stocks, cryptocurrencies
Number of AssetsOver 1,000
PlatformsMetaTrader 4, MetaTrader 5, proprietary mobile app
Customer ServiceLive chat, email, FAQ section
Demo AccountYes
RegulationFCA, ASIC, CIMA

FP Markets

FP Markets broker

FP Markets sets itself apart with a focus on quality charting tools and comprehensive market analysis features. The platform’s advanced candlestick charting functionality allows for precise identification of patterns and trends, which is crucial for making strategic trading decisions. FP Markets supports WebTrader, allowing traders to invest directly from any browser or device.

Also, integrating with MetaTrader 4 and MetaTrader 5, FP Markets offers traders access to a suite of analytical tools, enhancing the ability to conduct in-depth candlestick analysis. This integration ensures that traders have at their disposal powerful charting capabilities, including a broad array of technical indicators and graphical tools essential for detailed market evaluation.

FeatureDetails
Tradable AssetsForex, indices, commodities, ETFs, stocks, cryptocurrencies
Number of AssetsOver 10,000
PlatformsMetaTrader 4, MetaTrader 5, Iress, WebTrader
Customer ServiceLive chat, email, phone, FAQ Section
Demo AccountYes
RegulationCySEC, ASIC

Conclusion

To summarize, candlestick charts offer insights into market sentiment, helping traders predict potential price movements by spotting patterns. We’ve covered four of the most popular candlestick patterns, but there are dozens more that traders should learn. Consider using one of the brokers we’ve mentioned and engage in one of their guides in the educational section to gain a deeper understanding of candlestick charts.

Remember, mastering candlestick charts requires combining practice with knowledge, and patience is key. As you explore beyond the basics into more complex patterns, your ability to read the market movements will grow. The brokers we’ve highlighted provide not just the tools for analysis but also a wealth of educational resources to support your learning journey. Dive into these resources, practice consistently, and apply your knowledge in real-time trading scenarios. 

Frequently asked questions on Candlestick Charts:

What Is a Candlestick Chart?

A candlestick chart is a type of financial chart used to depict the price movements of an asset. It shows the open, high, low, and close prices for specific periods, offering insights into market sentiment and potential price movements.

Why Are Candlestick Charts Important for Traders?

Candlestick charts are crucial because they visually represent market behavior, helping traders identify trends, reversals, and continuations in price movements. This information aids in making informed trading decisions.

How Can Candlestick Patterns Help Predict Market Movements?

Candlestick patterns, through their shapes and formations, offer clues about potential market movements by highlighting trends, reversals, and momentum changes. This allows traders to predict price directions more accurately and make trades based on the information.

Are There Any Recommended Brokers for Trading With Candlestick Charts?

Yes, brokers like RoboForex, Vantage Markets, and FP Markets offer robust candlestick charting tools and educational resources, making them recommended options for traders looking to utilize candlestick analysis. Also, they offer advanced trading platforms that have integrated technical analysis tools to help with candlestick chart analysis.

Can Candlestick Charts Be Used for All Types of Trading?

Yes, candlestick charts are versatile and can be used across different markets, including stocks, forex, commodities, and cryptocurrencies, making them suitable for various trading styles.

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