Candlestick Charting For Dummies is here to show you that candlestick charts are not just for Wall Street traders. Everyday investors like you can make sense of all those little lines and boxes, with just a little friendly Dummies training. We’ll show you where to find these charts (online or in your favorite investing app), what they mean, and how to dig out valuable information. Then, you’ll be ready to buy and sell with newfound stock market savvy.
How to Read a Candlestick Pattern
No pattern works all the time, as candlestick patterns represent tendencies in price movement, not guarantees. The above chart shows the same exchange-traded fund (ETF) over the same time period. The lower chart uses colored bars, while the upper uses colored candlesticks.
Bearish Falling Three
Bar charts and candlestick charts show the same information, just in a different way. Candlestick charts are more visual due to the color coding of the price bars and thicker real bodies. Highlighting prices this way makes it easier for some traders to view the difference between the open and close. Daily candlesticks are the most effective way to view a candlestick chart, as they capture a full day of market info and price action.
Candlestick Charting For Dummies Cheat Sheet
Note the trend is mostly sideways in this first circled example. For this reason, waiting for the reaction to these candles is usually best for risk management. In the end, it all boils down to context and the story of buyers and sellers behind the tape. The stock opens, proceeds lower as bears are in control from the open, then rips higher during the session. But after putting in a decent high, the bulls settle back and give the bears some control into the close.
Bullish vs. Bearish Candles
In the example above, the proper entry would be below the body of the shooting star, with a stop at the high. It can be found at the end of an extended downtrend or during the open. It is clear to see that the candles open low and close high. Bulls were clearly in control during each session with very little energy from the bears. By default, most platforms will show a red or black candle as bearish.
The open tells us where the stock price opens at the beginning of the minute. The wicks (also known as shadows or tails) represent the highest and lowest recorded price from the open and close. The hanging man looks the same as the hammer, but it appears during bullish trends and suggests that a correction to the downside might soon materialize. A slight variation of this pattern is when the second day gaps up slightly following the first long up day. Everything else about the pattern is the same; it just looks a little different. When that variation occurs, it’s called a « bullish mat hold. »
Another key candlestick signal to watch out for are long tails, especially when they’re combined with small bodies. Long tails represent an unsuccessful effort of buyers or sellers to push the price in their favored direction, only to fail and have the price return to near the open. Just such a pattern is the doji shown below, which signifies an attempt to move higher and lower, only to finish out with no change. This comes after a move higher, suggesting that the next move will be lower. Traditionally, candlesticks are best used on a daily basis, the idea being that each candle captures a full day’s worth of news, data, and price action.
Candlestick graphs give twice as much information as a standard line chart. They also allow you to interpret stock price data in a more advanced way and to look for distinct patterns that provide clear trading signals. A candlestick chart is a type of financial chart that shows the price action for an investment market like a currency or a security. In order to read a candlestick chart, figure out what each different part of a candlestick tells you then study the different shapes to learn about market trends.
They consist of a random candle and another bigger candle that fully encompasses or engulfs the price action contained within the first. Candlestick charts show that emotion by visually representing the size of price moves with different colors. Traders use the candlesticks to make trading decisions based on irregularly occurring patterns candlesticks for dummies that help forecast the short-term direction of the price. Candlesticks that have a small body—a doji, for example—indicate that the buyers and sellers fought to a draw, leaving the close nearly exactly at the open. A hanging man pattern suggests an important potential reversal lower and is the corollary to the bullish hammer formation.
- An abandoned baby, also called an island reversal, is a significant pattern suggesting a major reversal in the prior directional movement.
- The morning star is the bullish opposite of the evening star.
- Let’s say you switch to a daily or D1 chart, where each candle represents 24 hours.
- On many platforms, you can select the colors you want to use.
All currency traders should be knowledgeable of forex candlesticks and what they indicate. After learning how to analyze forex candlesticks, traders often find they can identify many different types of price action far more efficiently, compared to using other charts. The added advantage of forex candlestick analysis is that the same method applies to candlestick charts for all financial markets. Candlesticks are great forward-looking indicators, but confirmation by subsequent candles is often essential to identifying a specific pattern and making a trade based on it. In particular, candlestick patterns frequently give off signals of indecision, alerting traders of a potential change in direction.
Crew believes there are three key aspects to successful candlestick reading. Seeing the doji candle will often indicate an upcoming price reversal. Candles are bullish or bearish depending on the direction of the price during the period they are drawn for. Even though the pattern shows us that the price has been falling for three straight days, a new low is not seen, and the bull traders prepare for the next move up. As each candle is interpreted to suggest bullishness or weakness, it is important to realize the next move expected may not follow through on the next candle.
This is the foundation of why candlesticks are significant to chart readers. These patterns are common and reliable examples of bullish two-day trend continuation patterns in an uptrend. The bullish engulfing pattern appears during bearish trends.
The default color of a bullish Japanese candlestick is green, although white is also often used. If you’d like to learn more about reading a candlestick chart, check out our in-depth interview with Andrew Lokenauth. A candlestick has a body and shadows, sometimes called the candle and wicks. The wicks are an asset’s high and low price, and the top and bottom of the candle are the open and close price. Traders could take advantage of the shooting star candle by executing a short trade after the shooting star candle has closed. Traders could then place a stop loss above the shooting star candle and target a previous support level or a price that ensures a positive risk-reward ratio.
