How To Read A Candlestick Chart: With Real Examples

How To Read A Candlestick Chart

Even though traders have a variety of tools to analyse the markets, learning how to read a candlestick chart effectively is probably the most important one.

Learning how to read a candlestick chart is a basic skill in technical analysis. It can help you read and predict future price movements and make better informed trading decisions.

A price chart is like a window that allows you to view the action in the market.

So in this article, you will learn about how to read a candlestick chart.

You will also learn about some of the common candlestick chart patterns that traders look for to indicate potential turning points in the market.

With that being said, let’s get straight in to it.

How to read Forex charts 

Forex price charts plot currency prices over time.

The vertical axis on the chart represents the price or the exchange rate between two currencies. The horizontal axis represents the price behaviour over time.

Currency price movements are segmented in to time intervals and each interval has four data points.

These data points are;

  • The opening price
  • The closing price
  • The high price
  • And the low price

Now let me explain how to read forex charts given this data.

Time intervals typically range from 1 minute periods to monthly periods. Meaning that you can view a chart where price data is segmented in to one minute intervals to monthly intervals. Also, there are many other time intervals in between.

Most trading platforms allow you to view price data in 1M (1 minute), 5M (5 minute), 15M (15 minute), 30M (30 minute), 1H (1 hour), 4H (4 hours), D (daily), W (weekly) and M (monthly) time intervals.

The image below shows a 1H candlestick chart. Each candlestick represents one hours’ worth of price data.

Each candlestick has an opening price, a closing price, a high price and a low price for the interval.

Each interval starts on the hour, every hour for as long as the market is open.

The open price is the starting price for the hour and the close price is the ending price for the hour.

If the image above was a 15M (15 minute) chart, each candlestick would start and end on the hour, 15 minutes past the hour, 30 minutes past the hour and 45 minutes past the hour.

If it was a 5M chart, each candlestick would start and end on the hour and then every 5 minutes.

I think you get the idea.

As the price action unfolds for the interval, the candlestick is being drawn in real time. When the interval ends, the candlestick becomes fixed in time encapsulating the corresponding price action data.

When the closing price is higher than the opening price, the candles are usually one colour. In this case they are painted green and these are known as bullish candlesticks.

When the closing price is lower than the opening price, the candles are usually another colour. In this case they are painted red and these are known as bearish candlesticks.

Bullish and bearish candlesticks indicate uptrends or downtrends in price for the interval.

The high price is the highest price the currency pair reached during the interval. This is represented as the highest point of the upper wick sticking out of the main body of the candle.

The low price is the lowest price reached during the interval. This is represented as the lowest point of the lower wick sticking out of the main body of the candle.

How to read a candlestick chart

To get access to real time and historical price data, you can register with a forex broker and download a trading platform.

How to read a candlestick chart

Knowing how to read a candlestick chart is straight forward now that you know what each data point represents.

Each candlestick has a body and usually a wick above and below it.

The body of the candlestick chart is made up from the open and close prices. This is the price area that is filled.  If the candlestick does not have an upper or lower wick, this means that the opening or closing price was also the highest or lowest price for that interval.

It is also possible for the opening and closing prices for the time interval to be the same.

When this occurs, the body of the candlestick will seem as if it doesn’t exist but it is just a very narrow body. These candlesticks could be in a third colour to distinguish them, since they are neither bullish nor bearish.

Like this;

Candlesticks like this represent a period of indecision from buyers and sellers as there is no clear direction for price. However, an indecision candlestick can also suggest a pause in a price trend before a continuation or the start of a potential reversal.

It is all about the context.

Learning how to read a candlestick chart is like learning to read in a different language. Looking at one candlestick alone is like reading one word in a sentence.

Reading a series of candlesticks together is like reading a sentence.

When you can string enough sentences together, you might be able to understand the story. This is achieved by analysing larger samples of historical data. This will also provide you with a better idea of the current price trend.

Also, analysing price action data on the higher time frames helps you to understand what is happening in the bigger picture. In other words, you get an even better idea of the dominant price trend.

Candlestick formations can occur in many variations and where or how they appear on the chart can have different meanings.

Reading what happened previously or the back story up to the current candlestick can potentially provide the clues about what might happen next.

Furthermore, candlestick analysis should be used with other tools or techniques to improve the probability of success. 

You will be able to make better informed trading decisions when you have a confluence of indicators, suggesting similar things.

This will also help with providing context since what is happening is important but where it is happening on the chart maybe even more important.

Blending candlesticks

To learn how to read a candlestick chart correctly, you must also understand the concept of candlestick blending.

This is what allows you to view Forex price data with greater or lesser detail over various time frames. It also allows you to see the hidden signals in the market that may occur over a sequence of candlesticks instead of just one.

When you are looking at a higher time frame candlestick chart, you will see lesser details regarding how that candlestick was formed.

When you view the candlesticks on the lower time frames, you will see greater detail regarding how the higher time frame candlesticks were formed.

Let me give you a couple of examples of how to analyse a candlestick chart so you can better understand this concept.

The image below represents the price action data on a higher and relatively lower time frame. The candlestick to the right represents one days’ worth of price action. We can see that it was a bullish day.

The candlesticks to the left represent the day’s price action in 4 hour intervals. There are six four hour intervals in a 24 hour period. This makes up one days’ worth of price action.

If we take the opening price of the first 4 hour interval, the lowest price reached during the day, the highest price reached during the day and the closing price of the last 4 hour interval. We have all four data points to draw one daily candlestick.

This is what I mean.

how to read a candlestick chart by blending candles

The daily candlestick seems relatively strong. It has a wide body and closed near its highs.

Analysing the candlestick chart using the 4 hour data might also suggest the same. As there does not seem to be any candlestick patterns that might suggest a reversal in price.

I will outline some common candlestick patterns below, so continue reading for that.

Although the last 4 hour candlestick for the day may suggest some short term weakness, because it closed off its highs for the interval. Further analysis is required on lower time frames to determine whether the buyers or sellers are likely to remain in control.

How to analyse a candlestick Chart

When you first open a chart to start analysing it, it is better to take a top down approach.

This means you should start on a relatively higher time frame and work your way down to a relatively lower one.

What you should be trying to identify at this stage is what the dominant, medium term and short term price trends are.

When you trade in the same direction as the dominant price trend, the probability of making profitable deals increases.

The image below shows three charts for the AUDUSD.

The chart to the left is a 1H (one hour intervals) candlestick chart. In the middle is a 4H (four hour intervals) candlestick chart.  The chart to the right is a daily candlestick chart.

multiple time frames using candlestick charts

These three charts represent the short term, medium term and longer term price trends respectively.

The data is the same, however and as previously mentioned, the different time frames show more or less detail.

You can get close to the price action or take a step back and see the bigger picture.

Price is price but it can be analysed from different perspectives when viewed historically across multiple time frames.

The time frames that you will use to analyse the candlestick chart and to determine these will depending on your trading style and investment objectives. I have explained in more detail about the different types of trading styles and the most common time frames used for each in another article.

Let me give you another example to show you how to read a candlestick chart.

This is a daily candlestick chart of the EURUSD. Each candlestick represents one days’ worth of price action data.

It is a relatively higher time frame and for this example, It will help determine what the dominant price trend is.

As you can clearly see, the price has been trending down for about a year. The better position to have taken over this past year would have been to look for shorting opportunities in this market.

This trend may or may not continue so you should also try to identify continuation or reversal patterns from the price or any other tools.

downtrend candlestick chart

Then we can move down to a relatively medium term time frame to see what the price is doing in more detail.

For this example, we can look at the 4H chart. This is an intraday time frame and each candlestick below represents 4 hours’ worth of price action data.

This candlestick chart provides a little more detail than the previous daily candlestick chart.

There are six 4H (four hour) candlesticks that make up the price action for one day.

It should be obvious by now that currency prices move in waves.

Even in longer term down trends, the price will correct itself and trend upwards in the medium or short term.

We can observe this in the chart below by drawing price channels that contains the price movement.

The upper and lower boundaries of these general price channels indicate historical areas of supply and demand.

By projecting these price areas in to the future, they can potentially provide clues about the general direction and potential turning points of prices.

Like it did here, this is what happened next.

Price is respecting the current bearish channel and seems to be heading towards the lower boundary of it.

A good time to have entered the market with a short (sell) position would have been when the price broke down, making a new medium and longer term low. This deal could have been closed for a quick short term gain.

Another better time to have entered the market with a short (sell) position would have been on the previous retest and bounce from the upper boundary of the current bearish channel.

Common candlestick patterns explained with examples

To read a candlestick chart correctly, you have to understand what candlestick patterns might suggest the continuation or reversal of the current price trend.

Sometimes they will just jump out from the chart at you, other times they will be hidden and disguised over several candlesticks.

This is why it is beneficial to take a step back and look at the bigger picture as well as blending candlesticks to get a more comprehensive read on the price action.

Bullish Candlesticks

bullish candlestick

Signs of strength

A bullish candlestick with a relatively wide price range and a wide body closing close to its highs.

candlestick showing signs of strength

Signs of strength

A bullish candlestick with a wide price range and a relatively narrow body close to its highs. Is more relevant after a recent downward move in price.

This can also be a sign of exhaustion after a recent downtrend in price. It can also be a sign of weakness after a recent up trend.

Any bar with a relatively wide price range and an open and closing price near its highs in a downtrend can be considered as a sign of strength.

Normal 

A bullish candlestick with a narrow price range with a relatively wide body closing close to its highs.

candlestick showing signs of weakness

Signs of weakness

A bullish candlestick with a wide price range and a relatively narrow body close to its lows. Is more relevant after a recent upward movement in price.

This can also be a sign of exhaustion after a recent uptrend in price.

Any bar with a relatively wide price range and an open or closing price near its lows in an uptrend can be considered as a sign of weakness.

indecision candlestick

Signs of indecision

A candlestick with a relatively wide or narrow price range with an opening and closing price close to the middle of the range.

Bearish Candlesticks

bearish candlestick

Signs of weakness 

A bearish candlestick with a relatively wide price range and a wide body closing close to its lows.

candlestick showing signs of strength

Signs of strength

A bearish candlestick with a wide price range and a relatively narrow body close to its highs. Is more relevant after a recent downward move in price.

This can also be a sign of exhaustion after a recent downtrend in price. It can also be a sign of weakness after a recent uptrend.

Any bar with a relatively wide price range and an open and closing price near its highs in a downtrend can be considered as a sign of strength.

Normal

A bearish candlestick with a narrow price range with a relatively wide body closing close to its lows.

candlestick showing signs of weakness

Signs of weakness

 A bearish candlestick with a wide price range and a relatively narrow body close to its lows. Is more relevant after a recent upward movement in price.

This can also be a sign of exhaustion or strength after a recent uptrend or downtrend in price.

Any bar with a relatively wide price range and an open and closing price near its lows in an uptrend can be considered as a sign of weakness.

indecision candlestick

Signs of indecision

A candlestick with a relatively wide or narrow price range with an opening and closing price close to the middle of the range.

How to analyse a candlestick chart with historical examples

The below candlestick chart shows 4H (four hour) intervals for the USDJPY.

how to read a candlestick chart

The future direction is still somewhat unclear because the overall trend is not clear. Although there are some signs of strength, further confirmation is required that an uptrend is being established.

The below candlestick chart shows the 4H (four hour) intervals for the GBPUSD.

The better trade to have taken would have been to look for short term bottoms to buy dips after the first or second new swing high.

reading a candlestick chart

The below candlestick chart shows the 4H (four hour) intervals for the EURUSD.

We can see some potential reversal patterns by blending candlesticks after up and down movements in price.

Lets see one more,

This is a 4H (four hour) chart of the EURJPY.

I have annotated the candlestick chart with signs of strength and weakness. You might also see examples in the chart where the signs would have failed or be preceded with a conflicting sign.

That is trading and anything can happen at any time. Things might seem easy with hindsight but it is challenging predicting the future movement of price in real time.

candlestick chart analysis

Key takeaways when learning how to read a candlestick chart effectively

Learning how to read a candlestick chart can help you make better informed trading decisions.

To read candlestick charts effectively, you should start by studying the past by looking for repeatable patterns that occurred at turning points.  

Candlesticks should not be analysed in isolation. It is important to pay attention to the bigger picture and read candlestick patterns with context.

There are no certainties when trading, and analysing candlestick patterns are just one tool that a trader can use to make trading decisions.

It is better to use candlestick analysis in conjunction with other tools and techniques and to test your observations and ideas on a demo account.

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