A wide range of trading instruments is open to the modern trader. You can choose any instruments, indicators and strategies.
One of the very important decisions is the choice of the chart type. In this article we will look at the candlestick chart and how to read and use them correctly.
To understand its essence, you need to understand what a candle is. A candlestick is formed every time period (timeframe). For example, if the timeframe is set at 3 minutes, then every three minutes another candlestick will be formed.
The candlestick is formed as follows
Its lower shadow is the minimum price for this period. After this shadow, the candle itself begins — this is the trade open price for this period. Next is the body of the candlestick, its length is equal to the size of the spread — the difference between the buy and sell prices for the period. The end of this candlestick is set at a mark equal to the sell price. After that, there is a shadow again, but this time the upper one. It denotes the maximum price value for this interval.
This is how a candle looks like. Its color depends on the direction in which the price has changed.
If the price rises, the candlestick will be green (or white, for some charts). If it falls — red (black).
How to read Japanese candlesticks on a chart?
Reading a Japanese candlestick chart is about finding certain patterns (patterns) or just signals. That is, you need to find some arrangement of the candles on the chart, which will tell about its further behavior. There are a huge variety of such models, but you only need to choose a few of them. These should be clear to you and easy to find signals.
Consider one of these signals
A shooting star is a signal that indicates a further trend reversal. If you see a candlestick with a relatively small body and a large upper shadow, you can be sure that the chart is highly likely to change its direction and go down.
There is also a reverse signal, very similar to the one described above.
It looks like this.
In this case, the body of the candlestick is also very small, and the shadow is relatively large, but the lower shadow is involved in this signal. The meaning of this signal is the same — a trend reversal, only in the direction of increase.
In order to learn more about how to read Japanese candlesticks, you need to study all the possible signals generated by them, and choose those that are easy to remember and easy to perceive on the chart.
It is important to remember that if you are using large timeframes, you should pay attention to the fact that the greatest response rate of these signals is achieved only when they are near the support or resistance level. This is very important to consider when trading for a long time.
Candlestick analysis is one of the fundamental skills a trader needs. This is the basics, without which it will be difficult. But they are not difficult to understand if you figure it out. There is another signal, which is also common and tells us about a trend reversal.
This signal is based on the absorption of the last candlestick of one or more previous ones. That is, if, for example, you have three candles, the last of which is larger than the previous two and has the opposite direction to them, this candle is called an engulfing one. And this signal should be interpreted as a trend reversal signal. Moreover, the chart will continue to move in the direction indicated by the last candlestick.
Let’s sum up
Reading candlesticks is a good way to predict future market behavior. There are many different patterns and signals they provide. If you learn to read them correctly, you can achieve a good result.