How to Read Stock Charts Candlestick

Reading stock market candlestick patterns is one of the most favored methods for stock traders to predict future changes in the marketplace. Even though the chart, at first sight, seems quite complicated, it can give people useful information about the past changes in the stock market, and moreover, information about traders’ behaviors.
 
Candlestick charts were originally invented in Japan when one trader found correlations between the price, demand, and supply in the market, which was also affected by trader’s emotions and behaviors. Because of its Japanese origin, the candlestick chart is also known as the Japanese candlestick chart.
 
Generally, stock trading candlestick patterns show information about the opening and closing positions and high and low prices for a certain time period. In most cases, the candlestick chart is used for day trading.
 
Candlestick charts are used for technical analysis. Usually, candlesticks are marked as different colors, mostly green and red or black and white. The colors show different dispositions of closing and opening points and traders’ emotions, whether they are bullish or bearish. Also, through reading stock charts candlesticks, traders can get information about a certain asset’s highest and lowest price.
 
Stock chart candlesticks are one of the most effective tools in the stock market. It is mostly used by investors who base their strategies on technical analysis. Let’s now take a look at how this tool works and how to read it.

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How to Read Stock Candlestick Charts

Understanding chart candlestick in stock trading allows investors to get more information about the marketplace, which then helps to make accurate predictions. Candlestick charts visually are similar to bar charts but contain a bit more information.
 
Firstly, stock candlestick charts consist of many rectangles. Each rectangle alternately is colored with two different colors, usually, the most used ones are green and red. The main part of the candlestick is known as the body. You can see on the candlestick a line that seems like a median and diversifies the body into two equal parts.
 
 
 
This line’s upper part is known as the upper shadow, while the lower one is called the lower shadow. For stock chart candlestick reading, it’s significant to know that through the body investors can define the first opening and the last closing for a specific time of period and high and low prices for a definite time. For example, if the candlestick chart is 5-minutes, this means that each candlestick shows information in each 5-minute interval. To make it more simple, imagine that there are two candlesticks colored green and red. The green body has shadows, as well, which are also called tails or wicks. Generally, the body is green if the trader can see the gain in a definite time interval. For example, if the upper part shows the opening and the lower part shows closing, if the wick, which comes from the rectangle’s upper side and is longer than the line which comes from the rectangle’s lower side, this means that the net price is positive, so a trader in this interval could find some gains. However, if the body is colored red this means that the reverse scenario occurred and the net price is negative.
 
To make reading a candlestick stock chart simpler, let’s discuss its parts one by one.
 

Open & Close Price

As already mentioned the candles represent the buying and selling of a stock in a certain time period. But, how do we know which part of the candle is open and which one is the close price? Let’s go back to the green and red candlestick example and say that the green body represents buying. That means it would open at the bottom of the body. So when the candle opens up right there buyers would have come in eventually and pushed it up above, which creates the green candle. The open and close locations of the candlestick will be determined based on which direction the price is going. If the price grows and closes higher than it opened, then the opening position will be at the button of the candlestick. The exact opposite happens when the price goes down. The open position will be at the top of the candlestick and the closing position will be at the bottom.
 

High & Low Price

The wick which is going higher and above from the candlestick body shows the change in high prices. The last point of the shadow estimates the highest price in a definite time period.
 
Imagine that the body opened up and pushed up at some point, but sellers pushed it down until it closed there. So that means, your bottom wick is going to be low. Hence, what probably happened was it opened up at the bottom of the body, and sellers tried to push it down so it turned red.
 
In the case of the red candle and according to stock charts candlestick patterns here’s what happened. It probably pushed up and turned green for a second and then sellers came back and said - “No, we're pushing this down”. Hence, they pushed it down and it pushed below the open price of the red candle and it dropped, and as soon as it did that it would have turned red. It dropped to a certain point no buyers came in to push it up. So it closed at that point at the end of that five-minute period, where the close price was at the lower price.
 

Price Direction & Range

Depending on the information which can be read through the candlestick chart, traders are allowed to define an asset’s price direction and range. Price direction on the chart is measured vertically with the use of the wicks or shadows. If the upper line is longer than the one which comes out of the body’s bottom side it means that the open price is below the close price.
 
Also, through the shadows and its technical analysis investors can find the most appropriate time for a specific asset to buy or sell. Depending on that information it’s easy for them to decide when it is worth buying an asset or selling it. Also, the price range varies between stocks and shares and can change at any time because of the volatile and liquid market.
 

Types of Candlesticks

There are several types of candlestick patterns. However, they are divided into two main categories - bullish and bearish. Those main categories have subcategories, as well. After a market downtrend, bullish trends can form, signaling a price pattern rebound. They are an indication for investors to consider opening a long position in order to benefit from an increasing trend. For example, bullish patterns are a hammer, inverse hammer, bullish engulfing, piercing line, the morning star.
 
In contrast with that, bearish candlestick patterns are formed after rapid price increases in the stock market and the following skepticism about the market price, which leads traders to close their long positions and open short positions to get high returns through the falling price. Bearish candlestick patterns are hanging man, shooting star, bearish engulfing.
 
Apart from that, there is a chart pattern which shows no changes in the market. Usually, those types of charts are called continuation candlestick patterns, and one of the most famous and used among them is known as Doji.
 

Shooting Star

Shooting star as already mentioned is one of the bearish pattern candlesticks. This pattern shows the increasing trend of an asset. To go back to the green and red candlesticks, let’s say that three green candles are shown in the chart, which shows the readiness of investors to pay more and more for the stock after realizing that they are overpaying for the asset the color of the candle body changes and becomes red, which means that the closing price is no longer more than the opening price. However, in this pattern, the red one followed by the three green bodies is called a shooting star, because it shows the highest price point in the chart.


 

Hammer

In contrast with the shooting star, the hammer is a bullish candlestick pattern. It is perfect for those traders who want to open a long position. It shows the time period when a certain asset starts a downtrend and indicates the point where the stock had the lowest price to buy. Usually, the hammer is followed by the three red bodies, that are showing a wide range in prices, and finally, the green one is the fact that traders decided that the price won’t go below an indicated price so they start buying it to open a long position and sell it more expensively to get money returns.
 

 

Bullish Engulfing

In the formation of a bullish engulfing pattern, it’s necessary to have two candlesticks - green and red. The main idea behind this pattern is that when the second day begins lower than the first, the bullish market drives the price higher, resulting in a clear success for consumers. The pattern is bullish engulfing when one of the candlesticks engulfs the second one fully and one’s length is higher than another’s. Bullish engulfing usually occurs at the end of a downtrend.
 

Bearish Engulfing

In contrast with the bullish engulfing the bearish one occurs in the chart when an asset’s price starts falling after a growing tendency. Generally, the bearish engulfing candlestick is followed by the trending candles that are usually green-colored and after the price starts decreasing the red-colored pattern appears in the chart which engulfs the previous green-colored candlestick. By this pattern, investors can observe the changes in the price movements and define an approximate peak of a stock price and the point where its price plummeted.
 

Doji

Doji pattern as already mentioned defines the condition when the prices are almost similar in the marketplace for a certain stock. In the case of the Doji pattern, traders can see that the candlesticks through the body and shadow are portraying the form of plus or cross. Depending on that form it’s easy to recognize a Doji pattern, which is considered as a neutral signal when there is no big difference between the buying and selling prices and therefore the net gain equals almost zero.

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Stock Candlestick Charts - Key Takeaways

Stock Candlestick charts are one of the most favored methods for traders who rely on technical analysis. Through the candlestick charts, they are allowed to predict future changes in the marketplace.
 
Candlestick charts aren’t quite easy to read. The chart involves rectangle-shaped geometrical figures with a divisor long line, all of them showing the close and opening price and the lowest and highest prices, as well, for a certain period of time.
 
Candlestick charts are prominent because of their several patterns. Because of their big number reading and recognizing patterns isn’t quite easy.
 
Usually, candlestick chart patterns are divided into two main categories - bullish and bearish. Through that traders are deciding whether it is worth opening a long or short position.
 
Except for the bullish and bearish patterns, there are continuous patterns that are showing stability in the prices. One of the examples of continuation candlestick patterns is Doji, which is reckoned as a neutral signal.

FAQ on Candlestick Charts for Stock Trading

What do the candles mean on a stock chart?

 
Candle charts are mostly used for technical analysis. They provide traders with information like open, close, low, and high prices for a certain stock during a definite period of time. Through the candles, traders can find out the time when the price was the most beneficial for buyers and the time when the price was the most proper for sellers.
 
Depending on that analysis investors are allowed to learn more about the marketplace, how it works and when it is the perfect time for them to invest their funds in certain stocks. What’s more, candles represent the traders’ emotions and their effect on the product’s supply and demand.
 

Do stock candlestick charts really work?

Yes, stock candlestick charts work and they are actively used by professional traders. The chart doesn’t guarantee you 100% effective results and success. However, through that, traders can technically analyze the past performance of a certain asset.
 
Depending on the trader and its behavior in the market whether he/she is bullish or bearish, he/she can learn whether a certain asset is the best fit for their strategy or not. Also, you should always remember that while trading in the stock market you don’t always have to depend on one tool. You need to use more tools for having maximally exact predictions, which is one of the significant things during stock trading.
 

Which candlestick pattern is most reliable in stock trading?

There is no exact answer to the following question, however, there are some indicators that can be used for evaluating whether a certain pattern can give you reality approached results or not. One of the viral indicators is to compare the pattern-based prediction to reality. If it shows little difference several times, then it can be used for stock trading.
 
However, if its based predictions are far from reality multiple times, then it supposedly won’t work. Apart from that, it all depends on your position whether you are going to step into the bullish or bearish market. There are many candlestick patterns in the stock market, however, two main categories are bullish and bearish patterns. Through your sentiments and the way, you are going to implement your strategy you can choose the one which fits you the most.

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