How To Read Candlestick Charts for Effective Crypto Trading

How to Read Candlestick Charts

All information and data on the website are for reference only
and no historical data shall be considered as the basis for predicting future trends. The size of the candle’s body indicates the absolute body height of a candle within each interval. Whether or not you’re reading a bullish or bearish candle, this value is always positive.

  • This action is reflected by a long red (black) real body engulfing a small green (white) real body.
  • It depends on the number of candlesticks required to form the patterns.
  • The pattern includes three consecutive long-bodied candles that opened in the real body of the previous candle and also closed lower than the previous candle too.
  • These two patterns are common examples of bullish three-day trend continuation patterns.
  • For example, such candlestick patterns as engulfing candlestick, dark cloud cover, cloud break, are strong reversal patterns, signaling that the ongoing trend is to reverse soon.
  • Candlestick charts originated in Japan over 100 years before the West developed the bar and point-and-figure charts.
  • While this is a key difference, it often doesn’t have a large impact, as more often than not, the opening price of a certain period is the same as the closing price of the previous period.

Such confirmation can come as a gap down or long black candlestick on heavy volume. Now the wide box of the of the figure above is called body and it represents the price range between opening and closing prices. If the latter is higher former than the open price, the body is empty (candlestick on the left). If opening price is higher than the closing price the body is filled. The thin lines represent the high and low prices and called the upper and lower shadows. You will see across the web that a shadow is also commonly referred to as the wick.

How to Read Candlestick Charts for Intraday Trading

When the open and close of stocks are almost equal, Doji candlesticks result. The candlestick that results from varying the duration of the top and lower shadows resemble a cross, an inverted cross, or a plus sign. The candlestick is one of the most widely used charting methods for displaying the price history of stocks and other commodities – including cryptocurrencies.

Today, Homma is viewed and respected as the grandfather of candlestick charts, thanks to his research on price pattern recognition. While the trend originated in Japan, it soon became widespread, and now is an essential tool for investors around the world in analysing trends and reversals on the stock market. Candlestick charts have become the preferred chart form for many traders using technical analysis. Munehisa Homma, a rice trader, is regarded as the originator of the concept. He used candlestick charts in the rice futures market, with each candlestick graphically representing four dimensions of price in a trading period.

Price Action Trading: Reversal Entries

The candle will be completed and a new candle will begin forming at the start of the new trading period. The next candlestick  opens above but then closes below the midpoint of the prior bullish candle. The longer is the bearish candlestick, the stronger is the trend reversal down. A bullish harami is a candlestick with long shadows and a small or no body that forms within the range of the previous down candle (black or red). Before you enter a buy trade, make sure the inverted hammer candle is bullish. The bullish sentiment can be confirmed by other candle patterns, like engulfing candlestick, hammer, three white soldiers, and so on.

These candles usually have short wicks and indicate a steady buildup of buying pressure on the market. The longer their bodies, the higher the chance that there will be an actual bullish reversal. This candlestick pattern is represented by a small red candle that follows a longer green one. The red candle’s body can be completely How to Read Candlestick Charts engulfed by the body of the previous candle. A hammer candlestick forms when a stock goes noticeably lower than the beginning price and then rises later in the day to end above or close to the opening price. The candlestick chart in FusionCharts Suite XT provides a robust and interactive interface for visualizing your stock data.

Why are candlestick charts popular?

Some beginner traders may recognize the bullish setup and enter a buy order at this point. Professional traders, on the other hand, will probably be waiting for the proper confirmation to enter the trade. In the GBP/JPY daily chart below, we can see that the GBPJPY price was bouncing around a strong support level, but failed to break below it. It penetrated the support level on the third try, but the market swiftly reversed and formed an Engulfing Bullish Candlestick pattern that signaled further bullishness in the market. Learn how to determine price movements and increase your potential to earn in the markets.