Financial Literacy · Stock Market

The Basics of How to Read Candlestick Charts for Trading Stocks

If you’re interested in trading stock, it’s very important to learn to read candlestick charts. Candlesticks convey much more information than any line chart, and that information is instrumental in calculating entries and exits for your trades. Here are the basics of properly reading candlesticks.

A candlestick represents four points of price information and the direction of the overall price for the given timeframe it represents. A one-minute candle will show you the opening price, the closing price, the highest price within that single minute, the lowest price within that minute, and whether or not the price closed higher or lower than its opening price. That’s an amazing amount of data compared to a single price point you’d get with a simple line chart! Let’s take a closer look at how a candle forms to see how to read these five data points within a single candle.

Generally, candles are colored either green or red. Most trading platforms will allow you manipulate the colors, but we will be discussing green and red candles. A green candle forms on your chart when the closing price of the stock is higher than its opening price. This means the price of the stock is moving up. The opposite is true of a red candle. When the closing price is lower than the opening price, your candle will appear as a red candle, giving you an instant note that the price of the stock is falling.

A quick glance at the five candles above tells you that the price is generally moving upwards. The four green candles show rising price action while the red candle in the middle represents a short dip in the price. This is easiest and most basic information to glean from a candlestick chart. Now, let’s break down the specific anatomy of candle.

Reading the Body of the Candlestick

Candlesticks have a wide “body” and narrow “wicks.” The body of the candle shows us to important price points within a given timeframe: opening price and closing price. On the green candle in the image above, you can see that the bottom of the body marks the opening price of the stock. The top of the body marks its closing price. because the closing price is higher that the opening price, we have a green candle with upward price movement. On the red candle, the top of the candle’s body marks the opening price while the bottom of the body marks the closing price. The candle is colored red because the closing price is lower than the opening price. Now that we know what the body of the candle represents, let’s tackle the wicks.

Reading the Wicks of the Candlestick

The wicks (sometimes called “shadows”) are the narrow vertical lines that form on the tops and bottoms of candle bodies. The top wick represents the stock’s highest price point within a given timeframe. The bottom wick represents the stock’s lowest price point within a given timeframe. Wicks can be short, long, or nonexistent. Now that we know what the color, body, and wicks represent, let’s practice actually reading a candlestick.

Reading a Candlestick

Reading candlesticks does take a lot of practice. Even if you can identify all the points of data within a candle, watching them form in real time and accurately identifying patterns takes real work and dedication. The skill is invaluable for trading, so it’s worth it to put in the time and learn this skill. Take a look at the picture below and identify the opening price, closing price, highest price, and lowest price.

Because the candle is green, you should identify the opening price at the bottom of the body. On this chart, this is right around $1.09. The closing price is at the top of the body and looks to be around $1.36. The longer wick on the bottom shows you that the price dipped all the way below $1 to around $0.96-$0.97. The very short top wick tells you the highest price hit just shy of $1.40. Your total price range is about $0.96 to $1.40 on this candle.

Now let’s look at a slightly different candle.

This candle has no wick on the top. That means that its closing price and its highest price are the same price. The candle closes at its highest price during the timeframe of this candle. This generally demonstrates strength in the stock’s price.

These are the very basics of reading candlesticks. It’s important to spend time looking at candles as they form in real time to get a feel for how they develop. I would recommend pulling up a chart of any stock during market hours and watching the candles form. This is the best way to get comfortable reading candles and price action. I personally like to use the Webull desktop application for my charts as it’s the one I’m most comfortable with for active trading. You can certainly watch charts and candles form on the mobile app as well, but if you can get a bigger chart that allows you to draw and make notes, you’ll progress more quickly. You can sign up for Webull here and earn two bonus stocks for doing so. You are able to change the timeframe of candles from 1 minute to 2, 3, 5, 10, 15, 20 and 30 minutes, or 1, 2, and 4 hours. You can also view charts with daily, weekly, and monthly candles. The great thing about candlesticks is that they can be manipulated to cover a lot of different timeframes. The most common timeframes that traders use vary based on their style of trading. Some people who scalp stocks rely on one-minute candles, while many day traders prefer the 5-minute candle. Daily candles are an excellent way to find long term support and resistance points or general trends in a stock over a longer period of time. It’s important to play with the time frames as you get better at reading candles to find what works for you and your trading style.

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