How To Read Candlestick Charts

Table of Contents

How To Read Candlestick Chart

Candlestick chart is the most popular form of price charts used by traders. In a candlestick chart, the price graph is represented in the form of a series of candles, hence it is called a candlestick chart.

Candlestick chart conveys useful information like the trend, bullishness/bearishness, volume at a simple glance. The chart is made up of red and green candles where each candle gives information about opening, closing and range of trading prices within a particular time frame.

Even if you are not a trader and just an investor, you should still have knowledge about candlestick charts. Because no news or other internet sources will give you more useful information about a stock than its price chart. 

You can understand the trend of a particular stock and also find an appropriate entry/exit point by reading candlestick charts.

Types of Candlesticks

Candlestick charts are made up of red and green candles.

Each candle represents the range of prices during a particular time period. In a 5-min candlestick chart, each candlestick represents a 5 min period; in a 10 min candlestick chart, each candlestick represents a 10 min period and so on. 

Green Candles represent that the closing price at the end of the time period is higher than the opening price.

Red candles represent that the closing price at the end of the time period is lower than the opening price. 
Let’s say you open a 10-min candlestick chart of stock at 9.30 am when the price is $ 230. If the price goes up and ends up at $ 233 at 9.40 am, the candle formed will be a green candle. 

Candle body – The highlighted portion (green or red) is the body of the candle which denotes the opening and closing price. So, the lower end of the body is the closing price in a red candle and the upper end of the body is the opening price.

Similarly, the lower end of the body in a green candle is the opening price and the upper end of the body is the closing price.

Candlewick – the upper shadow and the lower shadow represent the wick of the candle. The wick of the candle denotes the range of prices at which the stock has traded in that time duration.

For example, if the price had gone up to $ 234 and gone down to $ 225 in the 10 minutes, the length of the candle wick would have been from 225 to 234. And the body formed will be in the price range of $ 230 & 233.

How to Read Candlestick Chart for Day Trading

You just need to search the stock name in the search bar and scroll over the stock name to open the candlestick chart of the particular stock.

#1. Understand the Time Frames

Candlestick Charts are of different time frames. For day trading, 5-min, 10-min or 15-min candlestick charts are used, if you want to enter and exit a trade within a few minutes by taking advantage of small fluctuations in prices. This is called scalping. 

For example, a stock like Reliance continuously moves 2-3 dollar up and down almost every minute. If you want to capture this $ 1-2 price movement, you can use 5-min or 15-min charts.

If you wish to capture a larger movement of prices, you can use 30-min, 1 hour, 3 hour and Day charts to study the price action.

On a candlestick chart, the time is plotted on the x-axis and the prices on the y-axis. So, the candlesticks get plotted along the time scale as per the range of trading prices.

#2. Know What is Price – Action Analysis

You get the understanding of price action by reading the candlestick chart. In day trading, the main goal is to identify the ‘trend’ of the stock i.e. whether the stock will go up or go down. Price action analysis will help you do that. If a stock seems to be going up, it is on ‘uptrend’.

If the stock seems to be going down, it is said to be on ‘downtrend’. 

Once you are able to identify the trend of the stock, you can enter a trade in the stock to ride the trend. For instance, if a stock is on an uptrend, you can go long (i.e. buy trade) in the stock and exit the stock after capturing a part of the up move.

#3. Learn About Bullish and Bearish Candles

The strength of the buyer and sellers influenced the stock price movements. If buyers are stronger, the candlesticks will be ‘bullish’, and if sellers are stronger, the candlesticks will be ‘bearish’. 

Candles with full bodies represent strong buying (if green candle) or strong selling (if red candle). This is because a full-body candle basically means that the stock has traded at all prices in a particular time range, representing strong buying or selling.

If a candle has a long upper and lower wick, it indicates volatility in prices as it means that the price has gone up and down a lot but has not sustained at either level.

Candles with a body at the upper end with a long lower wick indicate bulls are in control. Similarly, candles with a body at the lower end with a long upper wick indicate bears are in control.

You will not be able to take a decision about whether a stock is bullish or bearish just by looking at 1 candle. You will have to analyze a series of candles to analyze the price action in the stock.

#4. Understand Trend, Corrections and Consolidation

A candlestick chart tells you a story about the stock price. If you are able to read the story well, you can make a winning trade. 

1. Trends and Corrections

If the stock price is continuously going up or down over a period of time, it is showing a trend. The trend could be for a day, a week, a month or even a year. 

But a stock will never continuously keep going up or down. There are periods of correction during a trend when the price will move in the opposite direction for a while before continuing the original trend.

If the correction continues for a long period of time, it might be an indication of a trend reversal.

If you look at the candlestick chart entirety, you will see the signs of the end of a trend. If you observe a trend, it will appear like a wave. 

For instance, in an upward trend, there will be a series of bullish candles and then some correction candles before there is a series of bullish candles again. 

Longer waves indicate stronger trends. If the waves get shorter, it might be a signal of trend exhaustion and possibly the end of a trend.

Let’s say Cipla stock opens at $ 700 on market opening which is 2% above the previous day’s closing. It keeps going up till it hits $ 720. Then it corrects and comes back to $ 710. 

At the end of the day, the stock closes at $ 725. In this example, the stock was on an upward trend but the retracement to $ 710 was a temporary correction.

2. Consolidation

There are phases of consolidation when the price moves in a narrow range and does not give much opportunity to make a profit. 

In a consolidation phase, neither the buyers or sellers are in control. Once one side takes control, there is a ‘breakout’. A breakout can be the beginning of a new trend.

Let’s say ITC stock opens at $190 and goes up to $193. Then it comes down to $ 189 and sustains in the range of $189-192 before finally closing at $191.5. In this example, the stock is said to be in ‘consolidation’.

📌 Disclaimer: Forex trading carries a high risk of loss. Only invest what you can afford to lose, and ensure you understand the risks before trading.