Candlestick Charts: The ULTIMATE Beginner’s Guide to Reading a Candlestick Chart – New Trader U | Omd Cialis

Candlesticks are a type of chart setup available on trading platforms that create a visual representation of price movement over a specific period of time. A candlestick shows a contrast between the open and close prices along with any range outside of the open or close price. They are colored to indicate bullish or bearish action.

The three main types of candlestick charts are as follows.

  • Red/Green candlesticks
  • Hollow candlesticks
  • Heikin Aschi

What do red and green candlesticks mean?

Using the default candlestick settings, the charts show the price action in green when the close is higher than the open and red when the close is lower than the open. This is a clear view of the sentiment for each candle over consecutive days and whether the price is consistently closing higher or lower compared to the open prices.

With traditional candlesticks, the body of the candle reflects the opening and closing prices of the period and the wicks show price action that is outside of the opening/closing range. Upper wicks show price action above the open and close range, while lower wicks show price action below the open/close range.

What does a hollow candlestick mean?

The hollow candle setting on a charting platform uses both hollow and filled candles to express more nuance in price action along with the colors white, red and black.

What does a hollow candlestick mean

Hollow candles consist of four components in two groups. First, a lower close than the previous close gets a red candle and a higher close than the previous close gets a white candle. Second, a candle is hollow when the close is above the open and filled when the close is below the open. The image above shows the four possible combinations of hollow and filled candlesticks when using hollow candlestick chart settings.

Red Hollow Candlesticks can show bullish reversal price action on an overall bearish chart. Also, when the close was lower than the previous close, making the candle red, in the period after the open, the price action was moving up, making it hollow. Although it closed lower than the previous trading period, there was buying pressure near the lows, causing it to close higher than the open.

The solid black candle is the reverse price action of the red hollow candle. Although the close was higher than the previous close thus making it black, the price action ended lower than the open making it a black filled candle. Even if a black-filled candlestick closes higher in the current period than in the previous period, it still shows selling pressure after the open price. This candle shows rejection of intraday highs and can be a standalone signal of a bearish reversal during an upleg or uptrend in price action, especially near new price highs.

There are four types of hollow candlesticks:

  • Hollow candles occur when the price closed higher than it opened.
  • Filled candles occur when the price closed lower than the open.
  • White candles appear when the price closed higher than the previous close.
  • Red Candles appear when the price closed lower than the previous close.

Note that white candlesticks have black outlines and are sometimes referred to as hollow black candlesticks.

Hollow candlesticks indicate bullish and bearish sentiment of the open and close for the current period versus the previous period.

How do you read a Heiken Ashi?

How to read a Heiken Ashi
Chart courtesy of TrendSpider.com

Heikin Ashi candlestick charts are another variant of traditional Japanese candlesticks. Heikin Ashi candlesticks use the open and close price data from the previous period and the open high low close price data from the current period to create a combination candle. That Heikin-Ashi formula Candlestick filters out much of the price action noise to focus more on the overall trend of a chart.

Heikin Ashi candles start in the middle of the previous candle before it and not at the level where the previous candle closed. This is an important differentiating factor between traditional candlesticks and Heikin Ashi candlesticks on a chart.

The name comes from Heikin, meaning “average,” and Ashi, meaning “pace” in the Japanese language. The Heikin Ashi candles attempt to filter price action to see the average magnitude and direction of prices. Heikin Ashi candles are not the same as the regular candle holders. Many of the common two and three candlestick patterns found in Japanese candlesticks are not found in Heikin Ashi candlesticks as there are no gaps. This other type of candlestick is mainly used to identify trends, trend reversals and technical analysis.

That Heikin-Ashi formula:

Open = (Previous Bar Open + Previous Bar Close)/2.
Close = (Open + High + Low + Close)/4.
High = The high of the high, open or close of the current period.
Low = The minimum value of the low, open or close of the current period.

When reading Heikin Ashi candlesticks, you need to look at their wick, body and color.

The top of the top wick is the highest value on the candlestick.
The bottom of the bottom wick is the lowest reading on the candlestick.
The body is the difference between the opening and closing prices of a period.
When the candle is green, the close value is greater than the open value and is plotted at the top of the body.
When the candle is red, the close value is lower than the open value and is plotted at the bottom of the body.

The main idea behind creating the Heiken Ashi type candlestick chart is that it filters the noise of the price action and creates fewer false signals by smoothing the candlestick patterns on the chart. Because the Heiken Ashi candlesticks are the result of average prices, these candles have smaller shadows/wicks than a normal candlestick chart.

Also note that there will be no visible gaps in the Heiken Ashi charts due to the average prices.

Similar to classic candlestick charts, the shadows signal the level of volatility and the extent of a trend. The smaller the shadow, the stronger the trend. The same applies to Heiken Ashi charts. A strong candlestick with a very small or no shadow indicates strong trending conditions. The trend is even stronger due to average prices. Heiken Ashi works best when it comes to spotting strong trends.

In a bullish uptrend when the candles start to have larger upper shadows. This shows reluctance to go higher, rejection of higher prices and selling pressure. The trend is losing momentum.

In a bearish downtrend when the candles start having larger lower shadows. This shows reluctance to go lower, reluctance to lower prices and some buying pressure. The trend is losing momentum.

The biggest benefit of using this type of candlestick chart is the smoothing of price trends. Unnecessary price movement noise and volatility are filtered with a laser focus on the direction of price movement.

As a result, price action traders are left with the true primary directional movement that the market is making on a chart. There is little room for confusion and error either Heikin Ashi candlestick charts.

How to read a candlestick chart for beginners?

Candlestick chart cheat sheetImage courtesy of Marwood Research.

Reading candlesticks quickly is like learning some kind of technical trading language. With time and experience, a trader can see what candlesticks indicate about current price action. A trader can begin to see the patterns that emerge as buyers and sellers shift price action around key technical price levels of resistance and support on a chart. Listed below are bullish, bearish and neutral candlestick chart patterns and it is important to view the signals they give in the context of the bigger picture of the chart.

Bearish candlestick patterns have a better chance of succeeding when they appear on a chart and are converging with other bearish signals such as overbought readings or the loss of key price support or a key moving average. The same is true for bullish candlestick patterns, which have a better chance of succeeding when they appear on a chart and are converging with other bullish signals such as oversold readings, or breaking above a key price support or resistance area, or retaking a key moving average.

Candlestick chart patterns show you the present, not the future. They can be used to position traders for good opportunities to capture the next direction of price action by aligning them with the path of least resistance. Profitable trading can occur when you follow the current trend on a chart and let your winning trades run and short your losing trades. All this with the right position size and discipline.

Bullish candlestick patterns on a chart visually indicate buying pressure. These patterns can indicate the possibility of a price reversal during a downtrend or the continuation of an already established uptrend. There can be single bullish candlesticks or bullish candlestick patterns that contain multiple candlesticks in a row.

Here are some of the most popular Bullish Candlestick Patterns:

Bearish candlestick patterns on a chart visually indicate selling pressure. These patterns can indicate the possibility of a price reversal during an uptrend or the continuation of an already established downtrend. There can be single bearish candlesticks or bearish candlestick patterns that contain multiple candlesticks in a row.

Here are some of the most popular Bearish Candlestick Patterns:

What do candlestick charts say?

Candlesticks create patterns on charts that can show a trader the path of least resistance during a trend, or identify an important high-probability reversal area on a chart when the existing trend or swing in price action turns.

The best use of candlestick patterns is to define good risk-reward ratios, using their patterns to first define risk, then take the path of least resistance, and then cut losses and let winners run.

Candlestick patterns are pure price action signals that can replace your own opinions and predictions with what the patterns they form tell you what is happening on a chart.

For an in-depth look at all the different candlestick patterns traders see on charts, you can also read my book: The Ultimate Guide to Candlestick Chart Patterns here on Amazon or my other best selling trading books on Amazon here.

I have also created trading eCourses on my website NewTraderUniversity.com here. My educational resources can save you time on your trading journey. Learn from my 30 years of experience in the markets.

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