Reading candlesticks for beginners
Being a trader can be difficult when you're just starting out. Every coin has its own chart with a lot of information. But what does this information actually mean? Many traders don't have a clue how to actually read candlesticks. You can make money reading candlesticks. There are a lot of ways to use candlesticks to your advantage. In this article we will give you the basic information on how to read candlesticks and use them to your advantage when trading. Do note that using candlesticks depends on the way you want to trade. If you want to buy and hold, candlesticks do not matter at all.
Reading time: 4-6 minutes (1.148 words)
What do you think candlesticks represent?
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All candlesticks are based on a specific timeframe. In the following example you see the chart of the market between BTC (Bitcoin) and ETH (Ethereum).
Source: Bittrex.com
In this case, the time frame is set to 30 minutes. You can see the time frame setting in the left upper corner. You can specify multiple timeframes from 1 minute to 1 month:
If you select a different timeframe the chart can change dramatically. The following example is the same chart as the first one but with a timeframe of 1 day instead of 30 min:
Do you see the difference? So what exactly is happening here? By selecting the time frame, every candlestick you see is representing that timeframe. So in the first example, every candlestick represents 30 min. In the second example, every candlestick represents one day.
2. How to read candlesticks?
Candlesticks have a colour that represents a bullish or bearish momentum.
What is a bullish momentum?
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A bullish candle is mostly green or white. A bearish candle is mostly red or black. If the price is dropping over a longer time period (weeks, months or years) of time, this is called a bear market. When the price is going up over a longer time period, this is called a bull market.
For example, the first candlestick chart above shows the 30 min time frame. The price is neither going up or down but sideways. This is called consolidation. But if you look at the bigger picture (the 1 day time frame chart above) the price is in a clear downtrend. This could be considered a bear market.
But how do you read candlesticks exactly?
In this example we have two candlesticks. Both candlesticks are based on four parameters:
- The opening of the price
- The close of the price
- The highest price
- The lowest price
What price type is number 1 in this picture?
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The top of the green rectangle represents the closing price of the selected timeframe.
The lowest price of the selected timeframe is represented by a line out of the bottom of the rectangle. This line is called a shadowline or a wick:
A wick can be really long. For example:
The wick from the top represents the highest price of the selected time frame:
Bearish candlesticks are exactly the same but the opening and closing price are the other way around. With a bearish candlestick, the top of the rectangle represents the opening price of the selected timeframe:
The bottom of the candlestick represents the closing price of the selected timeframe:
The wicks are the same. The wick from the bottom represents the lowest price and the wick at the top represents the highest price in the selected timeframe.
To recap:
- A bullish candle means that the closing price is higher than the opening price
- Bullish candles are always green or white
- The opening price
- The closing price
- The lowest price
- The highest price
- A bearish candle means that the closing price is lower than the opening price
- Bearish candles are red or black
- The closing price
- The opening price
- The lowest price
- The highest price
The best way to remember is that a green/white candlestick always has the closing price on the top. And a red/white candlestick has the closing price on the bottom:
Candlesticks can have many different shapes and forms. For example:
Example 1:
What is true about the following candlestick?
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- The opening and lowest price
- The closing price
- The highest price
Example 2:
- The closing price
- The opening price
- The lowest price
- The highest price
In this example we see a very small red rectangle with a long wick coming from the bottom. In this case the candle is red because the closing price (1) was lower than the opening price (2). The long wick implicates that there were a fair amount of sellers in this timeframe to push the price down. But there were also a fair amount of buyers that pushed the price back up. Number three represents the lowest price in this timeframe.
Example 3:
- The opening price
- The closing and highest price
- The lowest price
In this example we only see a shadowline coming from the bottom. There is no shadowline coming from the top. This implicates that the closing price = the highest price.
Example 4:
- The closing price
- The opening and highest price
- The lowest price
This example is exactly the same as example three. But in this case the opening price = the highest price.
Example 5:
What is true about the candlestick below?
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Example 6:
What is true about this candlestick?
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Can you determine the highest price of the first green candlestick in this 30 min time frame?
The top of the wick represents the highest price:
In this case, the highest price is 0.00000636. Can you determine the opening, closing, highs and lows of all candlesticks?
3. How do candlesticks help you with trading?
Candlesticks can help you determine where the price might be going. Although only reading candlesticks is not best practise. You should combine candlestick reading with other support indicators like a moving average. But that is beyond the scope of this article. To give you an example, take a look at the following candlestick:
What does this candlestick tell you?
- The opening and closing price are the same
- The lowest price is the same as the opening and closing price
- The long wick at the top implies that there were a decent amount of buyers. But even more sellers pushed the price back down again.
This could mean that the sentiment is bearish. Be aware that you should never look at just one candlestick. You should always look at the candlesticks before the last one to determine where the price might go. Take a look at the following example:
In this example there is a small uptrend. The long wick of the last green candlestick implicates that the price went up but sellers pushed the price back down. In the next candle, the sellers took control and the price went down. This particulair candlestick pattern is called a bullish three line strike (three bullish candlesticks following a bigger red one). Professional traders use candlestick patterns to determine their entry and exit points. But they always use other confluences (other indicators) to determine the right entry and exit points. You can read more about these patterns in my Ultimate Day Trading Guide.
Now you know how to read candlesticks.