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.
Trading Strategies
Trend Following
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
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
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.
