How to Read a Candlestick Chart
Candlestick charts have enjoyed continued use among traders because of the wide range of trading information they offer, along with a design that makes them easy to read and interpret.
The chart received its name because its markers, or indicators, have a body shaped like a candle, with a line on top that resembles a wick. These candles also have a "wick" on the bottom end as well.
On the chart, each candlestick includes an open, high, low and close price for the time frame. The trader sets the time frame of each candle. For example, to see the high, low, open and close price over a five-minute period, a trader would set the time frame of the candlestick chart to 5 minutes.
Every five minutes a new candlestick is created, and it takes five minutes to complete before another one begins. Candlesticks also show the current price, whether the price moved up or down over the time frame, and the price range the asset covered in that time.
Reading and Interpreting a Candlestick Chart
You can read and interpret candlestick charts as follows, based on price activity:
The open represents the first price traded during the candlestick, indicated by either the top or bottom of the body. If a price trends up, it has a green candlestick, and downward-trending price candlesticks turn red. The color changes depending on whether the price sits above, in green, or below, in red, the open price during the time frame of the candlestick.
The high is the highest price traded during the candlestick, 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.
The low shows the lowest price traded during the candlestick, 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.
The close is the last price traded during the candlestick, indicated by either the top or bottom of the body. Again, the upward candlesticks show as green, and the downward candlesticks show as red. The color indicates whether the closing price or last price if the candlestick hasn't yet completed, is above or below the open price.
While a candle forms, but before it completes, it constantly changes as the price moves. The open stays the same, but until the candle completes, the high, low and close could all change. The color may also change while a candlestick forms.
It may go from green to red, for example, if the current price is above the open price, but then drops below it. When the time frame for the candle ends, the last price is the closing price, and then the candle can no longer change. A new bar forms to show how the price moves over the next time segment.
You can see the direction the price moved during the time frame of the candle, 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. Traders often use green and red as common candlestick colors, but the colors can be altered to suit a trader's visual preference. Other common colors include white or blue for upward movement, and black (on a light background) for downward movement.
The price difference between the upper and lower tails shows the range the price moved during the time frame of the candlestick. 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.
Practice Reading the Charts
You can practice reading candlesticks by opening a demo trading account or play around with candlesticks on free web-based charting platforms. Set the chart type to candlestick, and then select a 1-minute time frame. This allows you to see a new candlestick every minute, and give you a good idea of how they work.
Learning how to read candlesticks and other chart types can help you learn how to day trade. Once you're comfortable with reading the charts, study other aspects of technical analysis and develop your own trading strategy. You can also learn how to use candlesticks to look for trading opportunities based on candlestick patterns, such as the engulfing candlestick pattern.
After you're comfortable with the basics of candlesticks, you can make subtle changes to the candlestick settings in your charting platform, if desired. In the settings, choose whether to base the candlestick color on the open versus the close price, or whether to base it on the close versus the prior close.
You may also choose to see the candlesticks as hollow, with only the border of the candle colored, or show them with the body filled with color.
No right or wrong way exists to set up the charts. The chart setups become your personal preferences, based on how you wish to analyze the data and set up your trades.