How Exactly Do Candlestick Charts Get Interpreted?

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Do you know what cryptocurrencies to purchase and when to acquire them? When researching crypto assets, you may come across a form of price graph known as a candlestick chart. So it’s a good idea to spend some time learning how they function.

Candlestick graphs, like more common line and bar graphs, display time across the horizontal axis and price data across the vertical axis. Candlestick graphs, on the other hand, provide more information than simpler graphs. At a glance, you can view an asset’s highest and lowest price for a particular timeframe, as well as its opening and closing prices.

 

What are candlestick charts?

Here’s an example of an actual Bitcoin-USD candlestick chart from Coinbase Pro:

Coinbase Pro: Candlestick chart

Candlesticks show you if a market’s price movement was good or negative, and to what extent. The timescale indicated by a candlestick might be rather different. Coinbase Pro, for example, has a default time of six hours — with each candle representing a five-minute chunk — but users may change it. (It’s also worth mentioning that, unlike stock exchanges, crypto markets are open 24 hours a day.) As a result, the “open” and “close” prices are the prices at the start and end of the chosen timeframe.)

Showing red and green candlesticks and where the open and close prices are.
  • Green candles show prices going up, so the open is at the bottom of the body and the close is at the top. Red candles show prices declining, so the open is at the top of the body and close is at the bottom.
  • Each candle consists of the body and the wicks. The body of the candle tells you what the open and close prices were during the candle’s time frame.
  • The lines stretching from the top and bottom of the body are the wicks. These represent the highest and lowest prices the asset hit during the trading frame.

What do candlesticks tell us?

Candlestick charts may indicate much more than price movement over time. Experienced traders search for patterns in order to assess market mood and forecast where the market will go next. Here are some examples of what they are searching for:

  • A long wick on the bottom of a candle, for instance, might mean that traders are buying into an asset as prices fall, which may be a good indicator that the asset is on its way up.
  • A long wick at the top of a candle, however, could suggest that traders are looking to take profits — signaling a large potential sell-off in the near future.
  • If the body occupies almost all of the candle, with very short wicks (or no visible wicks) on either side, that might indicate a strongly bullish sentiment (on a green candle) or strongly bearish sentiment (on a red candle).

Understanding what candlesticks can signify in the context of a certain asset or within specific market conditions is one component of a trading method known as technical analysis, in which investors seek to detect patterns and potential future opportunities by analysing historical price movements.

How to Interpret “One-Candle Signals”

Traders that trade in very short time frames may focus on just one candle at a time. As a beginner, familiarising yourself with these “one-candle signals” might be a beneficial practise. Four popular one-candle indications are depicted in the figure below:

Various candlestick types
  1. A long upper shadow could be an indicator of a bearish trend, meaning that  investors are looking to sell and take profit. The longer the upper shadow, the stronger an indicator.
  2. A long lower shadow could be a bullish signal, indicating that investors are looking to buy, thus driving prices up. The longer the lower shadow, the more reliable the signal.
  3. A Doji candle has no body, because the open and close prices are the same. These can typically be interpreted to mean there is indecision in the market, and are a possible indicator for an upcoming price reversal. (Why “doji”? Candlestick charts were first used by Japanese rice traders in the 18th century. “Doji” means error — presumably because it would be uncommon for prices to open and close in the exact same place. )
  4. Umbrellas have a distinctively long bottom wick. A red umbrella is also known as a hammer. When you see a hammer it often means that the asset is receiving some serious buy action — and the price might soon be on its way up. Green umbrellas, on the other hand, have an ominous nickname: hanging men. They’re often a signal that sellers are ready to cash out — reversing the up cycle.

It is crucial to remember that one-candle signals can be useful, but an accurate reading of the market necessitates a grasp of the larger context. It’s also difficult to identify trends and patterns in candlestick charts. Consult a professional adviser if you are unsure about which investing plan is best for you.

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