Learning to read charts is an essential skill for any trader who wants to go beyond the basics. There are three popular chart types in trading: Line charts connect closing price points and this makes them easy to read, but they don’t provide a lot of detail. Bar charts track the opening and closing price of an asset for the selected timeframe, as well as the highest and lowest price point. Japanese candlesticks, also known as just candlesticks, contain the same information but in a visually pleasant way.
For the specified timeframe, a candlestick is formed by a body, which tracks the opening and closing price of the instrument and two shadows, one at the top which tracks the highest price point and one at the bottom which tracks the lowest price point. When the candlestick’s body is green, the instrument’s price trend is bullish so the closing price is higher than the opening price, whereas a red candlestick body suggests a bearish movement, where the closing price is lower than the opening one. In case you’re wondering why we call them “Japanese” candlesticks, it’s because they were first used by Japanese rice merchants long before online trading was a thing.
Knowing when to enter and exit a trade is the holy grail of trading. Effectively, most traders chase swing points, so they try to identify when a bullish (upward) trend will stall because turning downwards or when a bearish (downward) trend will reverse and move upwards.
Formation patterns in single candlesticks can give you an idea of where the market is going and help you identify imminent trend reversals. Here are some basic hints to look out for:
So how safe is it to base your decision on a single candlestick? You should definitely keep your eyes on the chart for these patterns because they’re good warning signs. But you will need to take a look at the surrounding candlesticks to make safer predictions. We will cover double and triple candlestick formations in the next lesson.
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