Lighting up a Candlestick

Candlestick charts are considered one of the most popular tools when conducting technical analysis of currency pairs and other financial instruments. It would be great for beginners to learn about candlestick charts before they start trading, we believe this would be of great use as they develop their trading strategy.

Candlestick

Every candlestick is given a chart containing 4 sets of data for whichever timeframe it represents; opening price, closing price, as well as the highest and lowest prices hit. Candlestick chart will consist of its body and two shadows or wicks. The body represents the opening and closing price, it's shadow which is also known as tails and wicks showcase the highest and lowest prices in a period.

Candlestick charts are easier to understand than normal bar chats and that information relating to price action in a given timeframe is clear to read. It is relatively easier to tell when the closing price was lower or higher than the opening price. Occasionally a candlestick will be shown as black or red, representing periods when the closing price was lower while an empty candlestick chart can be seen as either as white or green indicates when the closing price was higher.  

Reading Candlestick charts 

There is more than 1 way to read it and multiple books dedicated to this practice. We shall provide a brief simple way of understanding this data. First, candlestick charts are usually plotted using the following periods, 5 minutes, 15 minutes, 1 hour, daily and weekly periods. Take note that there are also other timeframes such as the 4-hour period which is less popular.

If the wick is long, it means that trading during the specific period went much further than the opening and closing prices, while a short wick usually indicates that trading was mostly restricted to the range covered by the opening and closing prices.

                                                              Decoding Patterns

                                         

The Spinning Top

A candlestick chart pattern that is consisting of a candlestick with a small body and very long shadows. Its small body represents that there was little change between the opening and closing prices. However, the long upper and lower shadows indicate that both sellers and buyers were quite active over the trading period.

The pattern would indicate that traders are quite unclear and for most cases would result in a change in direction of the prevailing trend. Its appearance of a spinning top within an uptrend could signal the beginning of a downtrend, while the opposite is true of a spinning bottom appearing in a declining market.

An example of the spinning tops and Doji patterns on a chart

Doji

The Doji is a pattern that forms when the opening and closing prices over a given period are very close, or almost the same, resulting in a very narrow body. This method usually indicates a lack of direction in the markets, but could also signal the end of a given trend.

An endpoint of Doji is that having a very long upper shadow and no lower shadow, which usually indicates that a bullish trend might be nearing its end; this Doji rarely occurs in a downtrend. The long-legged Doji typically indicates indecision in the underlying market and they are important when they occur in strong uptrends or downtrends as they indicate that the forces of supply and demand are balanced.

Nutshell

We hope that this brief introduction to candlesticks charts and provide you with a better understanding of this technical analysis instrument and the types of candlestick patterns. Beginners can benefit greatly from this article, but they should look to study this technical analysis tool in more detail.