We are going to teach you how to read candlesticks because they are one of the most popular tools in technical analysis and for good reason. They can give you a quick snapshot of price action and help you identify potential reversals or continuation patterns. But in order to read candlesticks effectively, you need to know what to look for. Here's a quick guide to reading candlesticks like a pro.
What are candlesticks and why are they important in trading/investing?
Candlesticks are a type of financial chart that shows how prices of stocks, commodities, cryptocurrencies, and other financial instruments have moved over certain periods of time. Candlesticks provide traders with valuable insights into how the market is performing.
Understanding how to read candlesticks allows investors to recognize patterns, estimate future market direction, and make more informed decisions. Mastering how to read candlesticks provides traders with information about how likely something is to go up or down in price – giving them the power to respond quickly to market action with rational decision-making.
Once you learn to identify the top patterns, you'll need a consistent approach to executing on them and managing your risk. With a few simple inputs, you can calculate your position size quickly with our calculator.
How to read a candlestick chart – key components
Reading candlestick charts can seem intimidating at first, but with a few helpful tips, it will become second nature in no time. A candlestick chart is a type of financial chart used to visualize the open and close prices of an underlying asset. Each candle on the chart represents one specific period of trading activity; their colors typically represent whether the closing price was higher or lower than the opening price. Key components include the open, high, low, and close, which together help traders interpret market sentiment by displaying buy and sell signals.
Common Candlestick Patterns
As you become more familiar with reading candlesticks, you’ll start to recognize common patterns that have been used for centuries. These include patterns like the “hammer candlestick” and the “bullish engulfing pattern“. If you want an easy reference guide to the most powerful candlestick patterns, we put together the candlestick pattern cheat sheet to help you train your eyes.
Bullish vs. bearish candles
One of the most important components of reading candlestick patterns is distinguishing between bullish and bearish candles. Bullish candles indicate that buyers are in control and that prices are likely to continue moving up. Conversely, bearish candles such as the bearish engulfing pattern indicate that sellers are in control and that prices may be about to fall. By paying attention to these signals, you can gain a better understanding of the levels of support and resistance in a given market.
Putting it all together
Reading candlesticks is an essential skill for any trader or investor, and with practice, you’ll be able to identify patterns that could help you nail down your next trade. Take your time to study the components of a candlestick chart and familiarize yourself with the most common patterns. Once it becomes second nature, you will begin to identify candlestick patterns instantly and make more informed trading decisions. Good luck and happy trading!