Trading with Candlestick Charts Explained

Candlestick charts are one of the two most popular trading charts, because of the range of trading information that they represent, and their ease of reading and interpretation.

Candlestick charts consist of a wide vertical line, and a narrow vertical line. Each candlestick includes the open, high, low, and close, of the timeframe, and also shows the direction (upward or downward), and the range of the timeframe.
Charts Elements:
  1. Open - The open is the first price traded during the candlestick, and is indicated by either the top or bottom of the wide vertical line (the bottom for an upward candlestick, and the top for a downward candlestick). In the example chart, the upward candlesticks are colored white, and the downward candlesticks are colored black.
  2. High - The high is the highest price traded during the candlestick, and is indicated by the top of the thin vertical bar (the wick of the candlestick).
  3. Low - The low is the lowest price traded during the candlestick, and is indicated by the bottom of the thin vertical bar (the upside down wick of the candlestick).
  4. Close - The close is the last price traded during the candlestick, and is indicated by either the top or bottom of the wide vertical line (the top for an upward candlestick, and the bottom for a downward candlestick). In the example chart, the upward candlesticks are colored white, and the downward candlesticks are colored black.
  5. Direction - The direction of the candlestick is indicated by the color of the candlestick (specifically the wide vertical line). Usually, if the candlestick is white, the candlestick is an upward candlestick, and if the candlestick is black, the candlestick is a downward candlestick, but these colors can usually be customized. In the example chart, the upward candlesticks are colored white, and the downward candlesticks are colored black.
  6. Range - The range of the candlestick is indicated by the locations of the top and bottom of the thin vertical line (the wicks). The range is calculated by subtracting the low from the high (Range = High - Low).
  7. Upper Shadow & Lower Shadow - The long thin lines above and below the body represent the high/low range and are called "shadows" (also referred to as "wicks" and "tails"). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow.
Long Versus Short Bodies

Generally speaking, the longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent consolidation.
Long white candlesticks show strong buying pressure. The longer the white candlestick is, the further the close is above the open. This indicates that prices advanced significantly from open to close and buyers were aggressive. While long white candlesticks are generally bullish, much depends on their position within the broader technical picture. After extended declines, long white candlesticks can mark a potential turning point or support level. If buying gets too aggressive after a long advance, it can lead to excessive bullishness.
Long black candlesticks show strong selling pressure. The longer the black candlestick is, the further the close is below the open. This indicates that prices declined significantly from the open and sellers were aggressive. After a long advance, a long black candlestick can foreshadow a turning point or mark a future resistance level. After a long decline a long black candlestick can indicate panic or capitulation.


Long Versus Short Shadows

The upper and lower shadows on candlesticks can provide valuable information about the trading session. Upper shadows represent the session high and lower shadows the session low. Candlesticks with short shadows indicate that most of the trading action was confined near the open and close. Candlestick with long shadows show that traded extended well past the open and close.

Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated during the session, and bid prices higher. However, sellers later forced prices down from their highs, and the weak close created a long upper shadow. Conversely, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the session and drove prices lower. However, buyers later resurfaced to bid prices higher by the end of the session and the strong close created a long lower shadow.

Candlesticks with a long upper shadow, long lower shadow and small real body are called spinning tops. One long shadow represents a reversal of sorts; spinning tops represent indecision. The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both bulls and bears were active during the session. Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime. Neither buyers nor sellers could gain the upper hand and the result was a standoff. After a long advance or long white candlestick, a spinning top indicates weakness among the bulls and a potential change or interruption in trend. After a long decline or long black candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend.


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