How to Read Candlestick Charts

Therefore, it is important that you consider risk-management prior to entering any trades. Similar to other systems of trading, you will need to have an idea of where to stop out and where to take profits before you enter a trade. We also recommend that forex traders take stop-loss orders​​​ into consideration, as trading with leverage can maximise profits, but can equally maximises losses. An important consideration is the location of where these engulfing patterns are situated in the context of an overall price trend. It’s important to treat day trading stocks, options, futures, and swing trading like you would with getting a professional degree, a new trade, or starting any new career. We also offer real-time stock alerts for those that want to follow our options trades.

This situation could bring about a market reversal, which is a price move contrary to the preceding trend. Despite the everyday market noise, Dow believed that trends in prices do exist. It would be best if we didn’t start trading against a trend before its reversal is clear, but this is not always easy to do. As mentioned before, reading charts is not an exact science, and you can’t focus on just one signal. Candlestick patterns can be helpful, but they need to be read in conjunction with other indicators.

What are some popular candlestick patterns?

His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider. If the selling momentum is still stronger, the price will fall some more, breach the support level and create a new one. If you’re just starting your trading journey, our “complete guide for beginners” is aimed at you. The chart may look complicated at first, but it’s easy to understand, and we’ll show you how to read them. Start trading with a live account orTry a demo with £10,000 of virtual funds.

After a decline, or long black candlestick, a doji signals that selling pressure is starting to diminish. Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation may be warranted. The candlesticks illustrate where the price opened, closed, and the value ranges for the specific period.

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Forex candlesticks are especially useful in offering insight into the short-term price movements of the markets, making them a valuable tool for forex day trading strategies​. In a typical Japanese candlestick chart, each candlestick represents the open, high, low and close prices of a given time period for a currency pair. As with the hammer formation, a trader would place a stop loss below the bullish engulfing pattern, ensuring a tight stop loss.


While a doji with an equal open and close would be considered more robust, it is more important to capture the essence of the candlestick. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level. Neither bulls nor bears were able to gain control and a turning point could be developing. A bearish engulfing is where a huge red candle follows and covers a green one, indicating bears dominating the market. On the other hand, a bullish engulfing is the direct opposite and ends the bear market.

  • We will help to challenge your ideas, skills, and perceptions of the stock market.
  • Continuation candlestick patterns help investors recognize a rest period when buyers and sellers fight for control, but no side prevails.
  • Market Structure is the cornerstone of reading candlestick charts.
  • To understand how they work, let’s break down what a single candlestick means.
  • The style’s name refers to the way each time period is represented by a rectangle with lines coming out of the top and the bottom.
  • Candlesticks like the Hammer, shooting star, and hanging man, offer clues as to changing momentum and potentially where the market prices maytrend.

However, the trading activity that forms a particular candlestick can vary. In this case, the market breaks a bit higher during the opening and rallies to an all-time high during the mid-session before closing slightly over the open How to Read Candlestick Charts price. According to the Japanese traders, there’s no way a market can open and close at almost the same price unless an error occurs during the session. The direction of price in a candlestick depends on the color of the candle.

Engulfing pattern (bullish/bearish)

Meanwhile, short horizontal lines on the bar show the open and close prices. Each candlestick is composed of a real body and two wicks (which are also called shadows or tails). It reflects the difference between the open and close price for that period. Candlesticks are popular because of their superior visual appeal when compared to bar or line charts.

  • You have the option to trade stocks instead of going the options trading route if you wish.
  • However, a doji that forms among candlesticks with long real bodies would be deemed significant.
  • You can select the time frame or number of trades in the settings for your chart provider.
  • Marubozu do not have upper or lower shadows and the high and low are represented by the open or close.
  • A common bullish candlestick reversal pattern, referred to as a hammer, forms when price moves substantially lower after the open, then rallies to close near the high.