How to Read a Candlestick Chart
If you are a currency trader dealing with technical analysis, one of the most important skills that you can master is that of reading a candlestick chart.
As opposed to fundamental analysis which deals with the underlying economic factors that affect currencies, technical analysis involves studying the specific historical movement of currency prices as shown on graphs and charts.
The candlestick chart is one of the three kinds of charts that are scrutinized by traders looking for trends and patterns in the movement of a currency. The figure being measured here is the spot price of a currency. Each underlying economic factor makes the prices fluctuate, and these patterns can be clearly seen on a candlestick chart. Knowing how to read one allows you to make informed decisions on when to buy or sell a currency, and enables you to predict opportunities for entry.
Learning how to read a candlestick chart — and mastering that sublime combination of art and science – can make a trader successful and profitable when it comes to trading, and a deep understanding of it can minimize trading losses. The key to every successful prediction and trade is to identify what traders consider the most important thing: the trend of a currency price.
Basic Types of Charts
Candlestick charts are preferred by the majority of traders and brokers. Yet, before the candlestick chart was introduced to the Western world, other simpler charts took the limelight.
The line chart is basically the simplest to read, but it didn’t tell anything else except the general movement of the prices. It consisted of points on a graph which represented the figures of closing prices with a drawn line connecting the dots.
The bar chart is the predecessor of the candlestick chart. Each entry is represented by a vertical bar with a left node representing the opening price, and a right node indicating the closing price. If the closing price was higher than the opening price, the right node would be much higher than the left, and vice-versa. The top and the bottom of the bar represent the highest and lowest prices achieved within the trading day, respectively.
How to Read a Candlestick Chart
The candlestick chart is much easier to read according to many traders. Each trading event is represented by a colored vertical bar, typically with a vertical line above and below it. The color of the bar determines whether the closing price is lower than the opening price (usually red), or vice-versa (which in this case the bar is colored either blue or green, indicating a rise in prices). The bars upper and lower limits may indicate either the closing or the opening price, depending on the color.
Similar to a bar chart, the vertical lines extending above and below the candle bar indicate the highest and lowest prices that the currency has gone to.
The candlestick chart has several advantages over its counterparts which include:
1) Ease of use and interpretation. – Amateur traders will find the candlestick chart especially useful in the initial stages of trading. Colored bars are easy for the eyes to adapt to than simple lines and bars.
2) Specific terms for usual price patterns. – There are candle bars that look like spinning tops; “marubozu“ patterns that represent standing solid bars; cross, dragonfly, and gravestone dojis; and several other price and trading patterns that can be instantly identified.
3) Turning points of market movement are glaring. These pivotal changes in the movement of prices and market trading are obvious when you use a candlestick chart.
In learning how to read a candlestick chart, you will not only understand the basic patterns of the currency markets, but your trading acumen will also develop fast from practice.
If you are a currency trader who is dealing with technical analysis, one of the most important skills that you can master is how to read a candlestick chart.
As opposed to fundamental analysis, which deals with the underlying economic factors that affect the currencies, technical analysis involves studying the specific historical movement of currency prices as shown in graphs and charts.
The candlestick chart is one of the three kinds of charts that are scrutinized by traders looking for a trends and tendencies in the movement of a currency. The figure being measured here is the spot price of a currency. Each underlying economic factor makes the prices fluctuate, and these patterns can be clearly seen on a chart. Knowing how to read a candlestick chart allows you to make informed decisions on when to buy or sell a currency, and enables you to predict an opportunity for entry.
Learning how to read a candlestick chart — and mastering that sublime combination of art and science – can make a trader successful and profitable when it comes to trading, and a deep understanding of it can minimize trading losses. The key to every successful prediction and trade is to identify what traders consider the most important thing: the trend of a currency price.
Basic Types of Charts
Candlestick charts are preferred by a majority of traders and brokers. Yet, before the candlestick chart was introduced to the Western world, other simpler charts took the limelight.
The line chart is basically the simplest to read, but it didn’t tell anything else except the general movement of the prices. It consisted of points on a graph which represented the figures of closing prices with a drawn line connecting the dots.
The bar chart is the predecessor of the candlestick chart. Each entry is represented by a vertical bar with a left node representing the opening price, and a right node indicating the closing price. If the closing price was higher than the opening price, the right node would be much higher than the left, and vice-versa. The top and the bottom of the bar represent the highest and lowest prices achieved within the trading day, respectively.
How to Read a Candlestick Chart?
The candlestick chart is much easier to read according to many traders. Each trading event is represented by a colored vertical bar, typically with a vertical line above and below it. The color of the bar determines whether the closing price is lower than the opening price (usually red), or vice-versa (which in this case the bar is colored either blue or green, indicating a rise in prices). The bars upper and lower limits may indicate either the closing or the opening price, depending on the color.
Similar to a bar chart, the vertical lines extending above and below the candle bar indicate the highest and lowest prices that the currency has gone to.
The candlestick chart has several advantages over its counterparts which include:
1) Ease of use and interpretation. – Amateur traders will find the candlestick chart especially useful in the initial stages of trading. Colored bars are easy for the eyes to adapt to than simple lines and bars.
2) Specific terms for usual price patterns. – There are candle bars that look like spinning tops; “marubozu“ patterns that represent standing solid bars; cross, dragonfly, and gravestone dojis; and several other price and trading patterns that can be instantly identified.
3) Turning points of market movement are glaring. These pivotal changes in the movement of prices and market trading are obvious when you use a candlestick chart.
In learning how to read a candlestick chart, you not only understand the basic patterns of the currency markets, but your trading acumen and intelligence will also develop fast due to ease of interpreting it.
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