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Candlestick charts and how to read them

What are Candlesticks? 

So you’ve just started your trading journey and you’ve been using the charts available to you on the AltumFx MT5. However, you’ve been hearing the term 'candlesticks' and you’re not sure what a candelabra has to do with trading...

Well, first off, candlesticks are one form of charts that’s used in trading, and they’re the most widely used form of charts. They’re the best visual representation of the price action. Interestingly enough, this charting type was created over 100 years ago in Japan. In fact, candlesticks have been around before trading was even a thing!

The first instance of Candlestick usage was back in the 1700s, where it was used to chart the price of rice. The person who was named Homma, discovered that Candlesticks can show the emotions that play into markets via the patterns that Candlesticks create.

So what is a Candlestick up to?

Candlestick Anatomy

There are two main parts of a Candlestick. The Body and the Wick (no not John Wick). The body of the Candlestick is anything between the Open and the Close, which has a thick rectangular shape, while the Wicks are the thin lines on either side of the body. Check out the below diagram to see it more clearly. 

As you can also see, Candlesticks show the aspects of any chart. They are the High, Low, Open, and Close, as it’s clear in the image above.

Why are Candlesticks Used?

The main reason why candlesticks are so popular in trading is because of the patterns that they produce which are usually pretty good indicators of what might happen next. Not only that, but they have a much better visual representation when it comes to visual representation, these charts give a much nicer image than bars. 

Take a look:

The above image shows Bitcoin vs USD on a 1 hour chart. The chart on the left shows exactly what a candlestick chart would look like, and it’s quite easy on the eyes if we do say so ourselves. On the right, you see the bar chart, and let’s face it, it’s not very clear on where the open and close are.

Like we explained before candlesticks are also used to show certain patterns in how the market is moving and we can get more information on the next move.

Basic Candlestick Patterns

Candlesticks are created by up and down movements in the price. While these price movements sometimes appear random, at other times they form patterns that traders use for analysis or trading purposes. There are many candlestick patterns. Here’s a sampling to get you started.

Patterns are separated into bullish and bearish. Bullish patterns indicate that the price is likely to rise, while bearish patterns indicate that the price is likely to fall. No pattern works all the time, as candlestick patterns represent tendencies in price movement, not guarantees.

Bearish Engulfing Pattern

A bearish engulfing pattern develops in an uptrend when sellers outnumber buyers. This action is reflected by a long red real body engulfing a small green real body. The pattern indicates that sellers are back in control and that the price could continue to decline.

Bullish Harami

The bullish harami is the opposite of the upside down bearish harami. A downtrend is in play, and a small real body (green) occurs inside the large real body (red) of the previous day. This tells the technician that the trend is pausing. If it’s followed by another up day, more upside could be forthcoming.

There are a lot of patterns from which you can benefit from. We’ll tackle Bullish and Bearish patterns in future articles.

Have Questions?

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