How to read a candlestick chart

A candlestick chart is a type of financial chart that displays the price movement of a given asset within a given time frame. The candlestick chart is believed to have been created by Munehisa Homma, a Japanese rice trader who used candlesticks to represent the prices of rice. It was adopted and introduced to the Western world by Steve Nison, through his book Japanese Candlestick Charting Technique.

Many new investors rely on their gut instincts when entering the investment space. They buy and sell cryptocurrencies based on intuition and rely on inside information or ‘signals’ that may turn out to be pump-and-dump schemes.  To increase their chances of securing profits, investors read charts and candlesticks that provide the required information, based on price action and time frame.

Candlestick charts are characterized by 2 main components, the body and the wick. Each of these components represents a set of information that allows investors to quickly understand how the market is performing within a certain time period. 

Candlestick components

Body: This represents the price range between the opening and closing price of the underlying asset within a given timeframe;

  • If the body is green, it means the closing price is higher than the opening price — a bullish signal for that timeframe.
  • If the body is red, it means the opening price is higher than the closing price — a bearish signal for that timeframe.

Wicks: This represents the highest and lowest price of the underlying asset in a given time period.

Long and short candles

Candlesticks offer a simple representation of price action to investors. However, it may get confusing when you notice that the body and wick of a candlestick can vary in length — long wicks with long bodies, short bodies with long wicks, short wicks with long bodies and…well, you get the picture. 

  • If the body is long, it indicates that the buying and selling pressure is high during that timeframe.
  • If the wick is short, it indicates that the opening price and closing price of the underlying asset are very close to one another.

Chart analysis

As candlesticks are formed, certain patterns appear to give investors an idea of how the market is doing. There are bullish signals and bearish signals, which may indicate a turn of tide when the bulls push prices up or the bears sell out the market.

Though candlesticks provide investors with information about the underlying asset, it does not provide comprehensive information about the market or its volume and depth. This is why investors use additional tools like Moving Averages or the Ichimoku Cloud to determine the current sentiment of the market.  

Knowledge and experience in technical analysis, along with the use of such tools, can provide investors with more insight and information. Also, practice makes perfect — the more you read and analyze charts, the more likely you are to gain an edge in the trading field. On top of technical analysis, some traders also depend on other methods like fundamental analysis to gauge whether an investment is worth having in their portfolio. 

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