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How To Read Stock Charts | Introduction to Candlesticks

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Candle charts are popular among stock and Forex traders. They can be scanned and interpreted.  They offer a lot of information. The candlestick consists of a body that is shaped like a candle and has a shadow at the top or the bottom. The candlestick shows the open, the high and the low. For instance, if the trader sets a time frame of 5 minutes, a new candle will always be formed after 5 minutes. In such a case, the open and close prices will begin and end after 5 minutes. It will have the low, the high and the body.

The opening price

Depending on whether it is a bullish or bearish candle, the bottom and the top will indicate the open and the closing price. If the asset’s price is increasing, the low part of the candle represents the opening while the top represents the closing price at the end of 5 minutes. If the asset price is decreasing, the top represents the opening price while the bottom signals the closing price.  When the prices are moving up, the candle formed will either be white or green. But when the prices are trending down, it will be represented by a black or a red candle.

 Low price

It is shown by the end of the tail or the shadow of the candle. If the close or open was the same, no shadow would be present.

The highest price

After a candle has formed, the highest price attained is represented by the tail. This top may be above the body. But if the open and close price is the same, it may not have the upper shadow.

Close Price

It is the last price that was traded in the selected period. Note that candle formation changes as prices move up or down. The open remains where it was but the price may move high or low. It means that during the formation, the color may change from red to green or black to white. When the current period ends, the last price becomes the closing price.

Price Direction

It is possible to see the direction in which the price will move to in a given time frame. If the candlestick is white, it means the price closed some points above the point at which it opened. But if the candle is black or red, it means that the price closed a few points below the price it opened. Such a candle will form below the previous one. Note that all new candles will be formed on the right-hand side of the old ones.

Price Range

The price range is an essential consideration during candle formation. It shows how prices moved during a given time frame. It is the distance above the upper and the lower candle. The range can be arrived at by subtracting the lowest price from the highest price.

Reading the candles

Having looked at how the candle is formed, we need to spend a bit of our time learning how to read the candle.

The simple pattern

Typically, traders rely on patterns formed to determine whether the prices will be going high or low. Generally, when the price opens high and closes low, it represents a bearish pattern. And when it opens low and closes high, it represents a bullish pattern.

The Doji

It is referred to as a dragonfly Doji. It is formed when the opening price is the same as the closing price. There are two types of Doji. They include:

The Dragonfly Doji

It is created when the closing and the opening prices are the highest; it can have a longer tail that signals a bullish trend if it appears at the bottom. When traders see this type of candle at the bottom, they anticipate a reversal of the trend.

Gravestone Doji

It represents a situation when the closing and the opening prices are at their lowest for the session. When it features an upper shadow that is long enough, it shows that it is a bearish trend. But when the Doji appears at the top, it is a reversal signal.

The long-legged Doji

It refers to a Doji that features a long lower and upper shadow it shows that the market forces are strong and balancing

Hanging man

It is a white or a black candlestick consisting of a small body at the top. It may have a small upper shadow or a long lower tail. It forms a bearish pattern, especially when the lower tail is 2- 3 times its body height. If it appears on an uptrend, it signals a bearish pattern.

The hammer

As the name suggests, it forms a hammer-like candle. It could be black or white with a long tail, a small or no upper shadow. When it appears on a downtrend, it signals a bullish trend

Inverted black hammer

The hammer is upside down and signals a bottom reversal.

A shooting star

It consists of a white or a black candle with a small body, a little or no tail, and a long shadow (upper). It forms a bearish pattern when on an uptrend.

A spinning Top

It could be a white or black candlestick with a small body. It is a neutral pattern that can help in trading if it is interpreted alongside other formations.

It consists of a normal candlestick with no tail or shadow. The lows and highs are the openings and the closing prices.

Bearish harami

It consists of a combination of candles, a white bullish candle followed by a small bearish candle. When it comes after an uptrend, it indicates a bearish pattern.               

Bearish harami and across

A large bullish candle followed by Doji. It is thought to be a reversal signal if it is featured at the top of a trend.

Bullish Harami

It consists of a large bearish candle and a small bullish candle. When it comes after a downtrend, it is considered bullish

Bullish Harami Cross

It is a large bearish candle that is followed by a Doji. When such a candle appears at the bottom, it signals a reversal of the trend.

These are just some of the countless terms for a candlesticks formation and pattern. This can be your guide in making investment decisions. Learning this is an advantage to you. We cannot predict what will be happening in the market the following day, but we can tell or analyze the sentiment of the market on a certain stock.

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