Candlestick charts are a type of technical analysis tool, that is used by traders to identify price pattern & trends. Candlestick chart are one of the most popular technical analysis tools available and they are used by traders of all experience level.
Candlestick charts can be used to trade any financial instrument- including stocks, currency, commodities and indice. They are particularly useful for trading– short-term price movements, as they can provide traders with a lot of information about the market sentiment in a very short period of time.
What are Candlestick Charts?
Candlestick chart are a type of ‘price chart’ that show the open, high, low and close price of security over a specified period of time. They are typically displayed in vertical format- with each candlestick representing a single time period.
The body of the candlestick represent- difference between open and close price. If the close price is higher than the open price, candlestick is green or white. If close price is lower than open price, the candlestick is red or black.
The upper and lower wick of the candlestick represent the high and low price for the period. The longer the wicks, the greater the range of price movement during the period.
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Popular Candlestick Patterns
There are many different candlestick patterns that traders can use to identify price patterns and trends. Some of the most common candlestick patterns include:
A hammer candlestick has small body and long lower wick. It is a bullish reversal pattern, that indicates- the buyers are taking control of the market.
An inverted hammer candlestick has small body and long upper wick. It is a bearish reversal pattern, that suggests that seller are stepping in and taking control of the market.
A hanging man candlestick has small body and long upper wick. It is a bearish reversal pattern, that indicates – the sellers are taking control of the market.
A bullish engulfing candlestick is green candle that completely engulf- the previous red candle. It is a bullish reversal pattern that indicates- that the buyer are taking control of the market.
A bearish engulfing candlestick is red candle that completely engulf- the previous green candle. It is a bearish reversal pattern that, indicates that- the seller are taking control of the market.
A doji candle has small body and very short or no wicks. It is considered to be neutral pattern, as it indicate, that buyers and seller are evenly matched.
A morning star candlestick pattern is three-candlestick pattern that consist of black candlestick, white candlestick with small body and black candlestick with long upper wick. It is a bullish reversal pattern that suggest, that buyer are stepping in and taking control of the market.
An evening star candlestick pattern is three-candlestick pattern, that consist of white candlestick, black candlestick with a small body and white candlestick with a long lower wick. It is a bearish reversal pattern, that suggest that sellers are stepping in and taking control of the market.
How to Read a Candlestick Chart?
A candlestick chart is made up of a ‘series of candles’- each of which represent- a period of time, such as one minute, five minute, one hour or one day. The body of the candle represent the difference between opening and closing price for the period of time. The wick of candle, represent the highest and lowest price for period of time.
The color of the candle indicate- direction of the price movement. A green candle indicate, that the closing price was higher than opening price, while a red candle indicates that the closing price was lower than the opening price.
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You can use the information provided by candlestick to identify price pattern and trends. For example- green candlestick with long upper wick and short lower wick indicate, that the security traded higher during the period, but there was some selling pressure at the end of the period.
How to Use Candlestick Charts for Trading
To use candlestick charts for trading- you need to first learn to identify the different candlestick pattern. There are many different candlestick patterns, but some of the most common include:
- Bullish pattern: These patterns signal a potential upward trend in the price of the asset. Some common bullish pattern include – hammer, inverted hammer, morning star and bullish engulfing.
- Bearish pattern: These pattern signal a potential downward trend in the price of the asset. Some common bearish pattern include – hanging man, shooting star, evening star and bearish engulfing.
Once you have learned to identify the different candlestick patterns, you can start to use them to make trading decision. For example- you might buy an asset after seeing a bullish candlestick pattern or sell an asset after seeing bearish candlestick pattern.
Trend following strategy involve- buying asset that are in an uptrend and selling asset that are in a downtrend. Candlestick charts can be used to identify trends and to generate buy and sell signal.
Reversal trading strategy involve- buying asset at the bottom of a downtrend and selling asset at the top of an uptrend. Candlestick charts can be used to identify- reversal patterns and to generate buy and sell signal.
Breakout trading strategy involve- buying asset that are breaking out of trading range. Candlestick charts can be used to identify- breakouts and to generate buy and sell signal.
It is important to note that no trading strategy is guaranteed to be profitable. There is always the risk of losing money when trading financial markets.
Tips for Trading with Candlestick Charts
Choose the Right Assets to Trade
Not all asset are created equal when it come to trading with candlestick charts. Some asset are more volatile than other and some assets are more prone to false signals. It is important to choose assets- that are well-suited for trading with candlestick charts.
Use Multiple Candlestick Patterns
Don’t rely on a single candlestick pattern to make trading decisions. Use multiple candlestick patterns to confirm your trading signals.
Use Other Technical Indicators
Candlestick charts are a powerful technical analysis tool, but they should not be used in isolation. Use other technical indicators- such as moving averages and MACD to confirm your trading signal.
Use Risk Management
Risk management is essential for all trader, but it is especially important for traders, who are using candlestick charts. Candle signals are not always accurate- so it is important to use risk management tools, such as stop-loss order, to protect your capital.
Candlestick charts are a powerful technical analysis tool that can be used by traders to identify price pattern and trends. Candlestick charts can be used to trade any financial instrument and they are particularly useful for trading short-term price movement.
When trading with candlestick charts- it is important to use multiple candlestick patterns, to use other technical indicator and to use risk management.