Candlestick charts are great for making decisions and can be used in many different types of investing. But most people don’t know how to read them, or even that they exist at all. This article will go over how you can read candlestick charts.
1. Identifying Trends
The most important thing to do when reading candlestick charts is spot trends. Suppose one is looking at a longer period, whether weeks or months; identifying trends is rather easy. You need to figure out what direction the market has been going in for the period you’re looking at. Once you’ve spotted a trend, you can look for areas that might have been resistance or support before; these are now likely to be areas where a reversal could occur. You then have to look for the distance between these areas and see the biggest change. Candlestick charts are very easy to read.
2. Identifying Patterns
This is more difficult but allows you to identify patterns and better understand how the market works. If you’re looking at a one-minute candlestick chart, you can see that most of them form an “okay” shape. Most of them, but not all of them. If you look at a longer period, say nine months, you will see that no two candlesticks are ever the same. So what you do is spot the “okay” shapes and figure out how they vary from each other. Then, using this pattern and the fact that they almost always form an “okay” shape, you can predict where the price will go next!
3. Identifying Support and Resistance
This is very helpful in how a candlestick chart operator can visualize basic supply-and-demand mechanics. Candlesticks easily recognize which market direction is moving in by looking at how “filled” the candlestick is. If it’s filled in with a black candle, we know that prices are going up. If it’s filled in with a white candle, we know that prices are going down. How easy is that? After identifying this, you can look at the candlestick chart to see the support and resistance areas before. The resistant areas will now be supported, and the ones supported before will now be resistant. If the price had previously been traveling up, there was a high probability that the areas in which it had been stopped before would now be very good places to buy. You could also identify these places as zones in which prices generally bounce off when they are pulled down.
4. Identifying the Meaning of Each Type of Candles
Over time, the most important thing to learn with candlestick charting is to identify what each candle type means. This will help you figure out where the market is going or make you a more informed investor. Each candle has its name and means something different. You should learn as much about them as possible. There are ten basic candlesticks, and they follow the same rules. The bigger the body candle, the more volatile your market is. The longer the body candle, the faster your market is moving. And on and on with each type of candle; you get the idea!
Some examples of these Candles are;
1 Dragonfly Doji candlestick is a one-of-a-kind candle; it is only valid if found at the chart’s top during a bullish trend. This candle represents indecision in the market and is usually a leading indicator that the trend will reverse. It looks like a cross between a doji and an inverted hammer.
2 Hanging Man Doji candlestick- Another rare candle, but this one can be found on both sides of the market, but in different timescales or conditions. It represents indecision in the market and is a leading indicator that the trend will reverse. It looks like a cross between a doji and an inverted hammer.
3 Hanging Man Hammer candlestick- This candle represents indecision in the market and is a leading indicator that the trend is about to reverse. It looks like a hammer with the point up and bodies down.
4 Inverted Hammer candlestick – This candle represents indecision in the market and is a leading indicator that the trend is about to reverse. It looks like an inverted hammer with the point down instead of up. The shape isn’t always inverted, but usually, it’s near enough.
5 Shooting Star candlestick- This candle represents indecision in the market and is a leading indicator that the trend is about to reverse. It looks like an inverted hammer with a small body, but it has a long lower shadow with a little upper shadow.
6 Long White/Black Candle- The biggest candle type period. The white candle represents a downward trend, while the black candle represents upward. These candles are usually 1 to 2 times bigger than normal candles.
7 Three White Soldiers candlestick- This is a rare candle found only at the top of the market. It represents a rapid incline in price or rapid growth in the market.
8 Three Black Crows candlestick- This is a rare candle found only at the bottom of the market. It represents a rapid descent or rapid decline in prices.
In conclusion, you learn a lot from candlestick charts, and the real power is identifying the meaning of candles. Once you master the basics, you have access to indicators for professional traders, but it can be done at little to no cost by most people. So, in conclusion, candlestick charting can be very powerful; thus, understanding how to read a candlestick chart is important.