Candlesticks can be used as technical analysis tools. Unlike a basic line chart, every candlestick shows four data points: The opening price, the high, the middle, and the closing price. Since you’ve only scratched the surface of what candlesticks can show, we’re going to dive into the specifics of interpreting your preferred chart. With that said, let’s take a look at how to read a candlestick chart.
Like most charts, a candlestick shows the open and close, as well as the highest and lowest price over the long-term period. To read a candlestick, you must be able to visualize the candle-shaped pattern that indicates the direction of trend. Trendlines are useful indicators for interpreting these patterns. There are actually two types of trendlines: diagonal trendlines and trichotomy trendlines. Most traders tend to prefer the trichotomy line, because it shows a range of prices that is consistent within a long-term period of time.
Most traders interpret candlestick patterns in the same way as they interpret price action in the broader market. If you look at a bull in the market, you’d want to know its psychological traits. Is it consolidation? Is it an uptrend? It’s important to find out these psychological traits before buying or selling, and the most important question is how to read a candlestick chart.
A candlestick is basically a bar chart with color instead of scale. This means you can easily see the warts or pink areas that indicate candle-shaped patterns. It helps traders determine the direction of the market, but a lot of it depends on the time frame. Time frame refers to the length of a particular time period. For instance, a rise for a candle might indicate that a bear is about to break through in the same direction.
In order to show a profit potential from a reversal pattern, you need to have enough time for it to develop. Therefore, if you want to follow a bullish hammer, you should place your trades with enough time before it reverses. The best time-frame to watch for bullish candle formations is when the size of the candle increases for more than a couple of days in a row. The reason for this is that the size usually increases during a large number of high volume points.
Some traders use candlestick charts as a part of their overall trend analysis. A lot of traders believe the trend analysis is more important than technical analysis in determining whether a particular trade will make money or incur losses. This is not completely true because a trader does need to determine the size of the price points and also the duration of the trend.
There are four types of candle patterns – the double top, the reverse top, the up and down wicks and the combined candle. A double top occurs when the upper wick indicates a break out of a previously established upper trend. The lower wick represents a break in the lower trend. The combined candle shows a combination of the upper and lower wicks indicating the reversal of the trend. Traders use the combination of signals to decide whether to enter or exit a trade.
The price closed at the higher or lower price action level is considered to be the high or low of that day’s candlestick chart. The size of the candle on the left side indicates the size of the opening or closing price. Traders look at the size of the candle on the right side to determine the duration of the trend. This type of analysis is different from technical analysis in that the main purpose of this type of chart is to give the trader’s an indication of the price action and the likelihood of breakouts or reversal of the trend.