When trading, understanding how to read a candlestick chart can be a powerful way to determine who’s in control of a market; buyers, sellers or neither. In this article we’ll look at:

  1. The benefits of a candlestick chart
  2. Candlestick construction
  3. How to read a candlestick
  4. The 5 characteristics of candlesticks
  5. A candlestick chart example

Candlestick Chart Overview

In any transaction, be it buying a car, booking a holiday or investing in property, there needs to be a seller selling a product or service at a designated price and a buyer willing to pay it. Trading is no different.

Where trading is different however, is that the impact the actions of buyers and sellers have on price movement of any instrument is readily available for all to see thanks to the power of the internet and online price charting.

In its simplest terms, trading really is a function of demand versus supply and technical analysts spend a good deal of time studying charts, trying to ascertain whether demand is exceeding supply or vice versa.

To a new trader, determining who is in control of the market can be confusing to say the least, but it’s important to learn this skill because placing a trade without knowing who is in control (if anyone) is akin to putting it all on black.

Enter candlestick charting, our preferred method for understanding short term price action strategies and whether buyers or sellers have the reins.

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1. The Benefits of a Candlestick Chart

While there are many ways price can be represented on trading charts, candlesticks are one of the more popular. Here are a few reasons why;

  • They are easy to understand and interpret.
  • They give you the opportunity to detect trends earlier helping you to enter and exit the market with better timing.
  • They show the psychology behind price movement and the interaction between buyers and sellers, which helps make better predictions on future movement.
  • They can be used across any market and any time frame.

2. Candlestick Construction

The following is a graphical representation of how individual candles are constructed:

Candlestick Construction


3. How to Read a Candlestick

Once you understand how a candle is constructed, you are able to interpret how buyers and sellers have interacted to create the candle.

Read a Candlestick

4. The 5 Characteristics of Candlesticks

There are 5 characteristics of candlesticks you need to understand in order to read a candlestick chart. They are:

  1. Body colour
  2. Body size
  3. Shadow (or tail, or wick) position
  4. Shadow size
  5. Candlestick Range

1. Body Colour

Body Size 2
The body colour of a candlestick can give you a feel for who’s in control. A green (or light) coloured body represents buyers in control, whilst a red or (dark) coloured body represents sellers in control.

2. Body Size

The candlestick body size provides a read on the size of price movement and also how committed buyers or sellers are to the price movement. Larger body candlesticks represent a large price movement, which shows commitment to the price move from whoever is in control. If the candlestick is green, then buyers are committed. If the candlestick is red then sellers are committed.

Bear in mind that you need to view a candlestick in context to the other candles around it to determine its size.

 

Body Size

3. Shadow Position

The position of the candle shadow (also known as the tail or wick) also provides valuable information on price movement and who’s in control. A long shadow at the top of the candlestick represents sellers in control and a long shadow at the bottom of the candle represents buyers in control.

Shadow Position

4. Shadow Size

Likewise, the size of the candle shadow also needs to be taken into consideration.

Shadow Size

5. Candlestick Range

The range of the candlestick is the distance from the high point to the low point of the candle and represents volatility of the price during the candlestick period. A large range indicates the volatility has increased and a small range indicates the volatility has decreased. Don’t forget to interpret the range of a candle in context to prior candles.
Candlestick RangeThe following diagrams show how to interpret the different range sizes.

Candlestick Range 2

5. Candlestick Chart Example

The following chart shows all of the characteristics of candlesticks and how you can use them to interpret price action and determine who is in control.

Candlestick Examples

Candlestick Chart – Summary

Candlestick Overview