How to Read Candlestick Charts (and the MOST IMPORTANT pattern)

Part 2 of Our FREE ‘How to Trade Stocks‘-Guide

What are candlesticks?

A candlestick is a type of price chart that displays the high, low, open, and closing prices of a stock for a specific period. It originated from Japanese rice merchants and traders to track market prices and daily momentum hundreds of years ago.

The open price of a specific time period. The open is above the close when the price goes down (red candle) and below the close when price goes up (green candle).
The close price of a specific time period. The close is below the open when the price goes down (red candle) and above the open when price goes up (green candle).
The highest price reached during that period.
The lowest price reached during that period.
The most important part of a candlestick that shows significant support and resistance for a price.
Shows weakness to the top and indicates heavy selling.
Shows weakness to the bottom and indicates heavy buying.

When you have a green candle the open and close price of the candle are inverted.

The close price is above the open price which means there were more buyers than sellers in this time period.

Why should I use candlestick charts?

Candlesticks reflect the impact of investor sentiment on stock prices. They provide detailed information about price movement over a specific period and help traders to make more accurate trading decisions.

Bearish candle meaning the close for this 5 minute candle was below the open, hence it is red.
Bullish candle meaning the close for this 5 minute candle was above the open, hence it is green.

Different timeframes give a better picture

1 candle is equal to a period you select for the chart. There are several different time frames available depending on the chart software you are using (e.g., 1 minute, 5 minutes, 15 minutes, 1 day, etc.).

Traders look at various time frames to analyze the course of the stock, thereby its planned duration of a position (shares you want to own) often limit the time frame chosen. While a swing trader would watch more extended time frames like a weekly or a monthly chart, a day trader would more likely check the daily chart and lower. Both trading styles use the higher time frames to find out the general direction of the trade and then use the smaller time frames to find the correct entry.

Engulfing Candlestick

The engulfing candlestick is one of the most critical candlestick patterns you see about support and resistance zones. It’s candle body fully engulfs the body of the previous candle or the body of multiple previous candles. This engulfing body signals a change in direction.

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