A common question when dealing with the technical analysis of the stock market is; how to read a candlestick chart? Candlestick charting, also called bar charting, has been around since the 16th century. In it’s most basic form, a candle stick is used to display open and low at a given time on a particular chart, with the middle of the stick representing a bullish trend and the outer wick indicating a bearish trend. Learning how to read a candlestick chart is not as difficult as it might seem.
To begin learning how to read a candlestick chart, first it is important to note that there are two types of charts commonly employed in the trading world. The first is the bar chart, which is perhaps the most common chart in all of charting. The bar chart contains a basic color-scale format of green and red, with smaller ticks underneath the bar chart. Each color represents a different time period on the chart, ranging from the bottom of the green bar to the top of the red tick.
Bar charts are very basic and have no other feature other than being color-coding. It’s really the best way for beginner traders to learn how to read a candlestick chart because of its simplicity. However, as more time-frame charts are added to these formats, many traders have become wary of them. These time-frame charts attempt to provide an easy-to-read format that can be relied on by beginners. Unfortunately, many time-frame chart formats have come to rely on “fake” candle formations that produce false bullish or bearish signals based on varying market conditions.
In order to eliminate or minimize the occurrence of false signals, advanced traders should look for candlestick charts with real-time support and resistance levels. Support is typically found at the tops of candle charts, while resistance is located below the pattern. To show where the resistance level is, you simply need to place your cursor over the resistance, and it will highlight the point where it’s located. With this information, traders can gain a lot of confidence in their technical analysis abilities, which is important when entering the markets.
Lower Wicks: When looking at a candlestick chart, one of the things you should pay close attention to is the tendency for the lower portion of the pattern to flatten out and reach lower prices before the pattern becomes recognizable. The reason why this occurs is because a small candle formation becomes visible as the price action begins to move upward, but quickly re-form once the selling starts. This flattening out of the lower wick is what is known as “Hammer”. The higher price movement of the previous band becomes evident as the price action starts to move downward. This flattening out is caused by the formation of a triangle of support/resistance at the lower portion of the candle, which is broken by the price action.
High Price Relight: If the previous bands of support and resistance no longer appear, and the pattern is new, then the candle is considered “High Price Relight”. What makes a high price pattern “High Price Relight” is the fact that there is very little change in the price action from the previous band. Most high price patterns have an open near the previous high price and a low price near the previous low price. When the pen is near the high price, this indicates strong support, which is generally seen as the color of a candle with a black cloud surrounding it. When the pen is near the low price, this indicates strong resistance, which is generally found as the color of a candle with a light blue cloud surrounding it.
The pattern which is formed by these two colors is referred to as the converging pattern, and if you look closely at the candlestick charts, you will notice that this same pattern repeats itself on nearly every closing chart. In other words, the market is said to be in a state of convergence when there are strong support and resistance over a period of time. A typical bullish candlestick pattern would have a bullish open with the opening price close to or above the previous day’s high and the closing price close to or below the previous day’s low. As you may have noticed, the pattern does not seem to stop. But if you look at candlestick charts for bullish patterns, you’ll see that the pattern is broken when the price closes above the low.
These are just some of the things you need to learn about reading candlestick charts. I suggest you start looking for yourself in a local bookstore or browse through the thousands of free online candlestick charts available to you. With enough practice, you’ll soon be able to take any investment opportunity and turn it into a lucrative profit with little to no effort.