Read on and learn more about trading candles and their meaning. Find out how you can use it to make more intelligent trading decisions.
What is Candlestick Trading?
In a nutshell, candlestick trading refers to the use of candlestick charts as the basis for your trading actions. These charts started in Japan in the 1700s, even before bar charts.
As a visual tool, trading candle analysis can show fluctuations in an asset’s price. In turn, traders also use it to understand the future price direction.
Depending on the candlestick patterns, you can initiate different trades, You can implement long to short trades, which will depend on whether the candles show a bullish or bearish sentiment.
You can use candlestick trading in different financial markets. For instance, you can use trading candles at Bath and Body Works to understand stock prices. In addition, it also applied to forex, indices, and treasuries, among others.
How to Read Candlestick Charts
This trading candles cheat sheet will also discuss the basics of reading the charts. If you want to learn how to read trading candles, you first need to understand its three main components:
- Upper Wick: Also known as the upper shadow, it shows the asset’s highest price for a particular trading session.
- Body: It shows the differences between the opening and closing prices of the asset. If it’s red or black, the closing price is low. On the other hand, if it’s green or white, the closing price is high.
- Lower Wick: Also called the lower shadow, it depicts the asset’s lowest price for a particular trading session.
When reading candlesticks, it’s also vital that you learn the four data points:
- Open: It refers to the opening price of the asset at the start of the trading session.
- High: This is the top part of the upper wick, which shows the asset’s highest price. Nonetheless, if the highest price is also the open or close price, there will be no upper wick.
- Low: As the name implies, it’s the lowest price of an asset. If the market opens or closes at the lowest price, then there will be no lower shadow.
- Close: It’s the last price of the asset when the trading day or period ends.
Bearish and Bullish Candles
Looking at the candles can give you an idea about the general market conditions.
In the case of a bull candle, the bottom of the candle represents the open price while the top of the candle depicts the close price. When the close is above the open, the candle’s color is green.
On the other hand, in the case of a bear candle, the close price is below the open price. If the open is above the close price, the candle’s color is red.
Bullish/Bearish Engulfing Candles
You’ll see a bullish engulfing candlestick once a downtrend concludes. It consists of two candles wherein the first has a smaller body and shorter wick. Meanwhile, the second candle has a larger body and longer wick that engulfs the first candle.
On the other hand, in the case of bearish engulfing candles, it starts with the first one being bullish to show an uptrend. Meanwhile, the second is bearish, which engulfs the bullish candle.
While you can determine bullish and bearish sentiment by looking at two candles, it’s best to look at more candles. This way, you can easily confirm your earlier assumptions.
How to Analyze Candlestick Charts
One of the best ways to analyze trading candles is to look at the design of the wick or shadow. These are the upper and lower parts of the candle.
When the upper wick is longer than the lower wick, it shows active buyers. It also shows a low closing price.
On the other hand, if the upper wick is shorter than the lower wick, sellers were initially driving the prices lower. Eventually, buyers bought at a cheap price, resulting in a market recovery.
As earlier mentioned, you should also look at the color of the body. If there are consecutive red bodies, it means that the price is falling. On the other hand, if there are consecutive greens, it represents an increasing price trend.
Types of Candlesticks
To end this guide, let’s talk about the different trading candles names you might encounter. They represent different patterns and can be useful when executing a trading move.
- Hammer: A type of bullish candlestick, it has a short body and long lower wick. You’ll see it at the end of a downward trend, indicating a bounce back in price. In most cases, it’s triggered by a buying surge.
- Doji: It’s a type of continuation candlestick pattern, a doji indicates a struggle between buyers and sellers. On its own, traders view it as a neutral signal. Meanwhile, it can also be present in reversal patterns.
- Morning Star: This pattern has three candles — bearish, doji, and bullish. The second candle’s body should be completely outside the first and third candles.
- Evening Star: Like the morning star, it also comes with three candles, but they are in different sequences. It starts with a bullish candle, followed by a doji, and ends with a bearish candle.
- Hanging Man: A bearish candlestick pattern, the hanging man represents one candlestick as an uptrend concludes. The body is small while the length of the wick is almost twice the size of the body.
- Dark Cloud Cover: It shows a weak uptrend, which can also indicate a signal reversal. In this pattern, the current opening price is higher than that of the previous day. This pattern shows the bears taking over the trading session.
- Inside Bars: This pattern has two candlesticks. The first is the mother bar, which is longer, followed by the inside bar.