With humble beginnings dating back to the 18th century, candlesticks are now the most common way of charting in most financial markets, including the crypto markets. To many novice investors, these charts containing varied and often complex patterns can be overwhelming. However, even a basic understanding of how to read and recognize these patterns can help give traders an edge through price action insights to help plan their strategies.
In this article, we break down the basic anatomy of the candlestick – how to read candlesticks – along with basic trends formed from candlestick patterns that any trader should know.
Candlestick Chart
A candlestick is a graphical representation of the price action of a trading asset. It allows chartists and traders to visualize the open, high, low, and closing prices within a specific time period. While candlestick charts may also be used for analyzing other types of data, they were initially created as a tool that facilitates the analysis of financial markets.
For instance, a 1-hour chart consists of multiple candlesticks, each one illustrating a 1-hour market movement. Each candlestick displays the opening and closing prices (body of the candlestick), as well as the high and low price points (long lines above and below the body, also known as wicks).
Depending on the direction of the market movements, candlesticks have a different disposal of the closing and opening price, as well as different colors. Ascending candlesticks are usually depicted in green or black (filled), while descending candlesticks are usually red or hollow (white).
How To Read Candlesticks
Most traders utilize candlestick charts in their two colors: red and green, due to their easy interpretation:
- When a candle is red, its closing price was lower than the opening price; the price of the asset decreased during that trading period.
- When a candle turns green, the closing price was higher than the opening price; the asset's price increased during that trading period.
Body: The body indicates the open-to-close range. In other words, it indicates the difference between the closing and the opening price.
Wicks: These are also called tails or shadows. They reveal the highest and lowest price of an asset within the candlestick period. If there is no wick, the opening and closing prices are the lowest/highest price.
Highest Price: The top of the upper wick indicates the highest price traded during the period.
Lowest Price: The lowest price traded during the period is indicated by the bottom of the lower wick.
Opening price: This is the price at which the first trade happened during the new candlestick time period. If the price goes up, the candle turns green and conversely turns red on a price decrease.
Closing price: The closing price is the last price traded during the period of the candle formation. If this price is above the opening price, the candle will be green, otherwise, it will be red.
Understanding Candlestick Patterns and Trends
The trends usually are represented by the ups and downs of an asset’s price on the candlestick chart. The high and low points of several small trends are grouped to form a more significant trend. Such trends include:
- Upward Trends: It appears when a chart has new low points higher than the previous low while the new high points are higher than previous high points. During an upward trend, traders are confident to trade, and the market is generally bullish.
- Downward Trends: As opposed to upward trends, a downward trend refers to a chart with new high points lower than previous high points and new low points also lower than previous low points.
- Consolidation Trends: The prices in this trend do not go in one direction consistently. It switches between high and low, with the high and low points being relatively close to one another.
Closing Thoughts
Among the many varieties of charts, the candlestick is likely the most popular between traders and chartists. Possibly because candlestick charts are visually easier to interpret, as opposed to the conventional line and bar charts.
Since its creation, candlestick charts have been used and studied extensively and are now a crucial part of financial markets. As such, learning how to read candlesticks and identifying trends from candlestick patterns is one of the most basic and vital steps of any aspiring trader.
