How to Read a Candlestick Chart
Candlestick charts are popular, here's how to read them
Candlestick charts are a popular chart choice among traders, because of the wide-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 or below the body). Each candlestick includes an open, high, low and close price for 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 over a five-minute period, the traders would set the 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.
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 is 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 candlestick is not completed) is above or below the open price.
While a candle is forming (not yet completed), the candle will constantly change 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 is forming. It may go from green to red, for example, if the 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.
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. Other common colors are white or blue for upward movement, and black for downward movement.
Range - The price difference between the upper and lower tails show 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 Candlestick Charts
Set the chart type to candlestick, and then select a 1-minute time frame. This will allow you to see a new candlestick every minute, and give you good idea of how they work.
Learning how to read candlesticks (or another chart type) is one of the very first steps in learning how to day trade. Once comfortable with reading a chart, then move on to studying other aspects of technical analysis and developing a trading strategy.
Once comfortable with the basics of candlesticks, subtle changes can be made to the candlestick settings in your charting platform, if desired. In the settings, choose whether the candlestick color is based on the open versus the close (discussed above) or whether it is based on the close versus the prior close.
You may also choose whether the candlesticks are hollow (only border of candle is colored) or filled with color.
There is no right or wrong way to set up the charts. It is personal preference based on how we wish to analyze the charts and trade.
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. Learn the basics by watching candlesticks form in a demo account or on a free web-based charting platform. Traders also use candlesticks to look for trading opportunities based on candlestick patterns, such as the engulfing candlestick pattern.
Updated by Cory Mitchell.