What Is A Candlestick? The Basics Of A Candlestick
As a trader, there are a few things you have to know about the price movement of an asset. The open, the close, the highs, and the lows. These factors help determine how to invest in this asset, when to buy, and when to sell. This is where a candlestick chart comes in. To clarify further, candlestick charts are graphic patterns designed by traders. These patterns help traders determine possible price movements by using data from historical events. Using this data alongside other technical indicators, traders can accurately predict the trend of an asset. As long as there is no unexpected financial event that impacts the volatility of this market. In this article, we're going to discuss candlestick charts, the features of a candlestick chart, and how to read them like professional traders even if you're new to the trading market.
What Is A Candlestick? The Basics Of A Candlestick
A candlestick chart, as we've said earlier is a type of graphic pattern that is often used to technically analyze price movements. This chart displays the highs, lows closing, and open prices of a particular security for a calculated period. The origin of this chart came from Japanese rice merchants and traders who used this chart to informally track the prices of the market and the daily inflation/deflation in the market. The wide part of a candlestick is known as the body. This helps traders determine whether the closing price would be higher or lower than the opening price. It's important to know that the shape of the candlestick completely depends on how the highs and lows of the asset price compare to the open and close. Hence, there may be variances when it comes to shaping.
Another feature of the candlestick chart is to help traders determine entry and exit points while reflecting the effect of investor sentiment on asset prices. In other words, a candlestick chart would help you know further on when to enter and exit the market, open and close the trade or tell you how much liquidity was added by past investors. Generally, these charts are best suited in trading assets that can be affected by liquidity (stocks, forex, futures). When it comes to colors, there are different meanings to the chart. Normally, a white/green candlestick means strong buying. This indicates a bullish phase. On the other hand, a black/red candlestick indicates strong selling pressure. This means the phase is bearish instead. It's important to note that these signs should not be looked at individually rather than generally. Short-term trading strategies such as two-day or three-day candlestick patterns can also be considered when researching the whole thing.
How To Read Candlestick Charts Like A Professional Trader
To be able to read candlestick charts, there are a few things you have to know.
- Candlestick Charts are different from the normal charts as they provide a more detailed and more enjoyable visual of what the trader is dealing with when it comes to the prices of his assets.
- To be able to apply the candlestick chart to a trading strategy, you have to understand every part of the candle and what each part is meant to determine. This section would tell you more about reading a candlestick chart perfectly.
In a typical candlestick chart, there are three different aspects you need to consider. The open, the close, and the wick (upper and lower).
During the creation of this candlestick chart, there must have been a price that was used to open up this asset into the market. The opening price is what this aspect of the candlestick is focused on. If the opening price begins to move up, the candle would turn green or blue and if the price moves downwards instead, the candle turns red instead. Please, note that this is according to the general setting so your chart might present in a different color.
This is the price that was traded right before the candlestick chart ended. If the close price was higher than the open price, the chart would turn green or blue and if the close price was, on the other hand, higher than the open price, the chart would turn red. Again, it's important to know that this is the default setting. Your chart may necessarily not come in this color.
This is also one of the most important aspects of a candlestick chart. The wick also known as the shadow displays the extremes of price action over a specific period. You can quickly see the wick because they're always slimmer than the candlestick itself. This is where the candlestick comes in. It helps traders focus on their price movement and keep their eyes off noise and distractions like price extremes.
The direction in which the price is moving is also determined by the color shown on the candlestick. If the closing price is growing higher than the opening price, this would indicate that the price is moving upwards, therefore turning the candlestick green. If the closing price is, on the other hand, getting lower than the opening price, the price would be moving downwards and this would be indicated by the candle turning red.
The range is normally the difference between the highest and lowest price point on the candlestick. Hence, it can be said that the range is usually calculated by subtracting the lowest point on the candlestick from the highest point.
To get further info on how the colors on the candle are determined and how to calculate what they mean, check out the video below and thank us later.
TSLA candlestick Chart
Since we've been discussing how to read a candlestick chart, we must include some examples. The goal of these examples is to help further understand how the chart works and how they are being used in real-life data. So we're going to examine how it's working so far for Tesla (TSLA) and other stocks. Let's get right in.
November 18, 2021: The hanging man pattern was formed on TSLA's candlestick chart. The opening price was $1,106.55 and the closing price of $1,096.38. From this explanation, it can be determined that the candlestick turned red since the closing price was lower than the opening price.
November 22, 2021: TSLA formed a Doji candlestick pattern on the chart with an opening price of $1,162.3 and a closing price of 1,156.87. In this case, it's apparent that the closing price was lower than the opening price and this made the candlestick chart turn red.
NIO Candlestick Chart
Another stock we'll be looking at apart from Tesla is the NIO company's candlestick chart. Like TSLA, this would also be able to help provide more clarity and help trade better. Let's get into it then and do some historical data. Due to time constraints, we would only be able to analyze the readings for a couple of days (just so you get the idea).
November 18, 2021: The chart opened with the asset price capped at $39.00. However, the market closed on a red note due to the closing price getting lower than the opening price. The close was capped at $38.41.
November 19, 2021: This was a good day on the other hand as the market ended on a green note. The chart opened at $38.59 and closed at $38.66. This may not necessarily seem as much but this led the price movement upwards, thereby making the candle green.
November 23, 2021: The candlestick chart opened at $41.50 and closed at $42.04. This can be said to be good news, the direction of the price movement moving a little further. Since the closing price was lower than the open, this would create a reflected green candlestick on your chart.
Litecoin Candlestick Chart
The last one we'll be analyzing today is Litecoin. Again we advise that you visit any of the free screener tools online to get more accurate and more descriptive data. You'll get access not only to historical data but also to the live charts and you'll get to see everything as it's happening in real-time.
November 23, 2021: Now, this was a good day as the candlestick turned green. The chart opened with $209.200 and closed with $216.400. From this, it can be indicated that the closing price was higher than the opening price which would mean the price went higher, hence turning the candlestick green.
November 24, 2021: The chart recorded an open price of $216.200 and the closing price of 210.800. Since the price went down rather than up, it's safe to say that this candlestick was red.
There you have it, how to correctly read a candlestick. Like you've seen in the article, this chart mostly deals with open and close prices with the highs and lows in-between. So, go ahead, plot your candlestick chart and have a lovely day.