Reading candlestick charts – Talking points:
- Candlestick charts differ greatly from the traditional bar chart
- Traders generally prefer using candlestick charts for day-trading because they offer an enjoyable visual perception of price
- It’s important to understand the key components of a candle, and what they indicate, to apply candlestick chart analysis to a trading strategy
What is a candlestick chart?
A candlestick chart is simply a chart composed of individual candles, which traders use to understand price action. Candlestick price action involves pinpointing where the price opened for a period, where the price closed for a period, as well as the price highs and lows for a specific period.
Price action[1] can give traders of all financial markets clues to trend and reversals. For example, groups of candlesticks can form patterns which occur throughout forex charts that could indicate reversals or continuation of trends. Candlesticks can also form individual formations which could indicate buy or sell entries in the market.
The period that each candle depicts depends on the time-frame chosen by the trader. A popular time-frame is the daily time-frame, so the candle will depict the open, close, and high and low for the day. The different components of a candle can help you forecast where the price might go, for instance if a candle closes far below its open it may indicate further price declines.
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Interpreting a candle on a candlestick chart
The image below represents the design of a typical candlestick. There are three specific points
