How to Read a Candlestick Chart

Candlestick charts are popular, here's how to read them

Man showing how to read candlestick chart
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Candlestick charts are a popular chart choice among traders, because of the range of trading information that they represent. Candlestick charts are also easy to read and interpret.

Candlestick charts consist of a body (fat part of candle) and tails or wicks (thin lines above above or below the body). Each candlestick includes the open, high, low and close price of the time frame. The time frame of each candle is set by the trader.

For example, to see the high, low, open and close price (and price direction and range) over a five-minute period, the traders would set the the time frame of the candlestick chart to 5-minutes. Every 5-minutes a new candlestick is created, and it takes 5-minutes to complete, before another one begins. Candlesticks also show whether the price moved up or down over the time frame, and the price range it covered in that time.

How to Read and Interpret a Candlestick Chart

Candlestick charts are read and interpreted as follows (view a full-size chart example here):

Open - The open is the first price traded during the candlestick, and is indicated by either the top or bottom of the body. In the example chart, the upward candlesticks are colored green, and the downward candlesticks are colored red. The color is based on whether the price moves above (green) or below (red) the open price during the time frame of the candlestick.

High - The high is the highest price traded during the candlestick, and is indicated by the top of the tail that occurs above the body (called the upper tail). If the open was the highest price during the time frame, then there will be no upper tail.

Low - The low is the lowest price traded during the candlestick, and is indicated by the bottom of the tail that occurs below the body (called the lower tail).

If the open was the lowest price during the time frame, then there will be no lower tail

Close - The close is the last price traded during the candlestick, and is indicated by either the top or bottom of the body. In the example chart, the upward candlesticks are colored green, and the downward candlesticks are colored red. The color is based on whether the closing price (or last price, if the time frame is not completed) is above or below the open price.

Direction - The direction the price moved during the time frame of the candle is indicated by the color of the candlestick. If the candlestick is green, then the price closed above where it opened. If the candlestick is red, the price closed below where it opened. These represent upward and downward movements, respectively. Green and red are common candlestick colors, but the colors can be altered to suit a trader's visual preference.

Range - The range of the candlestick is indicated by the extremes of the upper and lower tails. The range is calculated by subtracting the high from the low (Range = High - Low).

Wide-ranging bars indicate a lot of volatility, while candlesticks with a small range indicate complacency and a lack of volatility. 

Final World on Reading Candlestick Charts

Candlesticks are a popular chart choice because they show price direction and how much an asset is moving (range) in a highly visual way. They also provide detail, in that the open, high, low and close price for each time frame are shown. Traders also use candlesticks to look for trading opportunities based on candlestick patterns (there are many candlestick patterns), such as the engulfing candlestick pattern and strategy.

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