Whether you’re a cryptocurrency or forex trader, you need to know how to read candlesticks for profitable trading.
Candlestick chart analysis reveals the behavior of buyers and sellers in the market. This behavior is represented by long wicks, large-bodied candles, etc.
You can then use this information to decide whether to long, short, or hold no position in the market.
Thus, understanding candlestick patterns is important for beginners and professional traders.
Admittedly, there are lots of PDF files, YouTube videos, Reddit tutorials, and websites that will teach you how to read candlestick trends but let’s show you how to interpret candles like a pro.
What are Candlesticks?
Candlesticks are green or red symbols on your chart.
Now if you’ve seen a candle in the real world, you already know what candlesticks are.
Picture your regular white long candle with a wick represented on your chart.
And that’s how simple it is!
What do candles represent?
Candlesticks represent price action in terms of what the buyers and sellers are doing. It shows the strength or weakness of these market participants.
A red candlestick tells you sellers are in control of the market. The size of this candle also reveals how much control sellers have.
Is it more or less control?
On the other hand, a green candlestick reveals buyers are in control.
Like the red candle, the size of the green candle tells you how much control the buyers have.
Now that’s out of the way, let’s proceed and show you how to read candlesticks.
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A green candlestick is called a bullish candle or said to be bullish, while a red candle is bearish.
A candle is also divided into different parts and these are the opening price, closing price, body, and wick/shadow (either side of the wick represents the high and low of the candle).
Wait a second!
Each part of a candle is important because it holds a meaning.
If the body of a bullish (green) candle is completely filled, it shows the strength of buyers is strong since the candle closed at or near the high.
The reverse is the case for a bearish (red) candle whose body is filled. It shows the strength of the sellers is strong.
Types of Candlesticks and Their Meaning
There are different types of Japanese candlestick patterns and each has a meaning.
These candlesticks are grouped based on how they exist and that is singly, double, or in trios.
Let’s take a look at each.
1. Single Candlestick Patterns:
These are candlesticks that can be interpreted on their own.
Dojis denote an indecision in the market by both buyers and sellers.
Here, the opening and closing price are very close to each other or at the same price.
Despite this, you can still tell whether the buyers or sellers are in control depending on where the candle’s body (opening and closing price) is.
Is the body at the high or low of the candle? Is it mid-way into the candle? etc.
The various types of dojis are:
- Standard doji
- Dragonfly doji
- Gravestone doji
- Long-legged doji
From the image above, the standard doji and long-legged doji depict indecision in the market whereas the dragonfly and gravestone doji hint at who has the upper hand.
Price opens and closes at the high of the candle on the dragonfly doji but opens and closes at the low of the candle on the gravestone doji.
So, which of these dojis would you say is bullish?
Of course it’s the dragonfly doj!
Take a minute and study the image below.
Hammers are reversal candlesticks that indicate price could reverse from an uptrend or downtrend.
The various types of hammers are:
- Inverted hammer
- Hanging man
- Shooting star
The hammer and inverted hammer are bullish candlestick patterns while the hanging man and shooting star are bearish candlestick patterns.
The direction of the market before each candle is formed helps you determine if it’s an inverted hammer or a shooting star.
2. Double Candlesticks Patterns:
Double candlesticks exist in pairs and they include:
a. Bullish and Bearish Engulfing:
Based on the term engulfing, you’ll interpret the pattern based on the candlestick that surrounds another.
To that effect, you have a bullish engulfing pattern when a bullish (green) candle covers a major portion of a red candle. This pattern denotes price could reverse to the upside.
Similarly, it’s a bearish engulfing formation when a bearish (red) candle covers a significant part of a green candle. This pattern denotes price could reverse to the downside.
b. Bullish and Bearish Harami:
Unlike the bullish and bearish engulfing candlestick patterns, the harami pattern denotes a small bullish or bearish candle beside a large bullish or bearish candle.
It’s bullish harami if there is a small green candle after a large red candle.
While it’s bearish harami if there is a small red candle after a large green candle.
c. Triple Candlesticks:
These are candlesticks that exist in threes.
Some examples of triple candlesticks are:
- Morning star
- Evening star
- Three white soldiers
- Three black crows
Morning star and evening star are reversal patterns, with one being the opposite of the other.
Three white soldiers are three bullish candles that appear in succession hinting price could surge further while three black crows are three bearish candles that appear in succession indicating a further dip in price.
Accordingly, the morning star and three white soldiers are triple bullish candlestick patterns whereas the evening star and three black crows are triple bearish candlestick patterns.
How to Read Candlestick Chart for Day Trading
Here’s how to read candlestick chart for day trading, scalping, or even investing on the long run.
1. Understand Candlestick Formation on Each Timeframe:
Do you know you can read 5 minute candlesticks and even those on other time frames?
The reason lies in the fact that candlesticks are formed on different time frames such as M30, H1, H4, D1, WK 1, MN etc.
This means for any given time frame you’re on, a new candlestick will be formed at the end of that minute, hour, day, week, or month.
Here’s what we’re getting at.
If you’re on a five minute (M5) chart, a new candlestick will be formed every five minutes.
And if you’re on the thirty minutes (M30) timeframe, a new candlestick will be formed every thirty minutes.
Interesting, six candles on your M5 chart merge to form a single candle on your M30 chart – Which is why if you’re looking to scalp the market, you need multiple time frame analysis to time your entry and exit points.
2. Interpret Candlesticks in Parts:
Yes, you’ve seen a green or red candle, but is that all you need to long or short the market?
No it’s not! There are more to candlestick chart analysis than colors.
You also need to pay close attention to size of the body and length of the wick.
Let’s take an example!
If the body of a green candle is small but the wick is long, it means one of two things:
A. Buyers have more control of the market since a long wick below the body represents a rejection of lower prices (the candlestick can be a hammer, long-legged doji, or dragonfly doji.)
B. Buyers are in charge but their strength is weak since a long wick at the top of the candle represents a rejection of higher prices.
Here, price surged to a certain level (top of the wick or high) but closed significantly below the high of the candle.
Nonetheless, we still have a green candle since the opening price is higher than the closing price.
Note that if you see a candlestick of this nature (inverted hammer) at the end of a downtrend or key level, it can lead to a reversal. The same way a shooting star at the end of an uptrend leads to its reversal.
Are you following?
3. Merge Candlestick Reading With Key Levels:
Call it a rule of thumb or a must-do, but always merge your candlestick reading with key levels.
What exactly are key levels on a chart?
Your support and resistance regions on trendlines and moving averages.
You know how a hammer is a bullish candlestick indicating possible price reversal to the upside? Yes?
You’re not going to jump in and long once you see a hammer unless it’s at a key level (support).
It can be the current support for a market in a range or previous support become resistance for a market in an uptrend.
Do you understand? Now let’s proceed.
Interpreting bullish or bearish candlesticks on key levels can improve your analysis significantly.
In line with that, let the trend guide you since the market is more likely to continue to the upside in an uptrend but dip further in a downtrend.
The same goes if the candlestick appears at the end of a trend since it could lead to a reversal.
Best Candlestick Patterns
The best candlestick patterns are often those that appear frequently and have a higher potential in leading to a reversal or continuation of trend.
Accordingly, the most common candlestick patterns you’ll come across are:
- Inverted hammer
- Hanging man
- Shooting star
- Evening star
- Spinning top or bottom
- Bullish or bearish engulfing
You’ve learnt how to read candlesticks like a pro.
Therefore, make the most of this knowledge during your technical analysis. And with constant practice, you’ll master the art of interpreting each candlestick.
Paper trading and using demo apps can also help to improve your technique.
Over and above that, understanding and mastering Japanese candlesticks becomes easier when you learn cryptocurrency trading with BiTA.
So what are you waiting for?