How To Read Candlestick Charts

How To Read Candlestick Charts

The Beginner Trader

How to read a candlestick chart

Before you can read a full candlestick chart with all those confusing lines and indicators, you need to know what a candlestick is made up of and what each individual candlestick tell us. So let’s start with the basics.

What is a candlestick chart?

A candlestick chart as it relates to a stock, gives us information on the price of a stock on a given month, week, day, hour, minute, or even second. It’s also a quick reference to the past price of a stock, and the chart will allow you to see trends. The time frame you choose to view the chart in (1min, 5min, 1D, 1Mo, etc.) depends on what your trading strategy requires. We will not get into in this post. A chart is made up of multiple candlesticks. The candlesticks can vary in size, shape, and color. Learning how to read a single candlestick is the first step in learning how to read the charts and look for patterns that will fit your future trading strategies. 

Bar Chart Sample

I labeled three areas in the image above:

  1. Stock Name & Symbol
  2. Time Frame
  3. Price

Depending on the software of brokerage you use, your chart may look a little different. However, the information is always the same. Each individual red or green bar is a period of time. In the example above each of the bars represents one full day of trading. On green days the stock went up, on red days the stock went down. Easy enough, right? Let’s look at the bars.

Making Sense of the Candlesticks

A single bar will give you 4 main points of information. A candlestick is made up of a body and (usually) one or two wicks. Although it is possible to have candle with no wicks. The color of the body tells you if the price went up or down during the time period that bar lasted. A red candles signifies the bar closed lower then it opened, or went down. A green candle tells you the opposite.

The 4 points of information a candlestick gives you:

  • The price the stock opened
  • The price the stock closed
  • The high of the stock reached on that candle
  • The low of the stock reached on that candle

Check out the images below and see if you can spot the one difference that would make a candle red or green. Do you see it?

Red Candle - Stocks Charts
Green Candle - Stocks Charts

The Shape Of The Candlestick

Each individual bar will also have it’s own “shape”. By that I mean that some may be really long, some may be really short, others may have long top wicks, and other long short wicks, etc.

Note: A single candle by itself does not tell us the direction a stock is going, but when combined with other candlesticks or indicators, they can be a good predictor. In the next section I will show you a few patterns you should know about. These patterns alone won’t do you much good, but when combined with other indicators not mentioned here, they can be good predictors of things to come. 

Green Hammer Candle

GREEN HAMMER

A green hammer candle at the end of a long downtrend may be the first signs of a reversal. Selling pressure (bears) is starting to get beat by buying pressure (bulls). The long bottom wick indicates that the stock dropped far lower during that day, but the bulls started to push back, ultimately driving the candle green.

If you want confirmation of the reversal, you may want to watch the following day’s close. If it closes higher, then you may be looking at confirmation of the reversal. 

NOTE: A green hammer candle works best as an indicator after a long downtrend. Seeing a green hammer when a stock is trading sideways or already on the way up, carries less weight as an indicator.

Red Hammer Candle

RED HAMMER

A red hammer candle at the end of a long uptrend may be the first signs of a reversal. Buying pressure (bulls) is starting to get beat by selling pressure (bears). The long bottom wick indicates that the stock dropped far lower during that day, but the bulls started to push back, ultimately driving the candle green.

If you want confirmation of the reversal, you may want to watch the following day’s close. If it closes higher, then you may be looking at confirmation of the reversal. 

NOTE: A green hammer candle works best as an indicator after a long downtrend. Seeing a green hammer when a stock is trading sideways or already on the way up, carries less weight as an indicator.

Inverse Hammer Candle

INVERSE HAMMER

Similar to a green hammer. a green inverse hammer candle at the end of a long downtrend may be the first signs of a reversal. In this scenario the stock price opened low, gained steamed at some point during the day and was beaten back by bears. However, the bulls held their ground and kept it green, gaining on the day. 

If you want confirmation of the reversal, you may want to watch the following day’s close. If it closes higher, then you may be looking at confirmation of the reversal. 

NOTE: A green inverse hammer candle works best as an indicator after a long downtrend. Seeing a green inverse hammer when a stock is trading sideways or already on the way up, carries less weight as an indicator.

Shooting Star Candle

SHOOTING STAR

A shooting star candle that appears at the end of a long uptrend, may signal the start of a reversal. You may be able to guess why it’s called a shooting star. In this scenario the stock price opened high, shot up at some point during the day, and began selling off ending in a red shooting star.  The bears put an end to a bull run and that may continue.

If you want confirmation of the reversal, you may want to watch the following day’s close. If it closes lower than the previous day, then you may be looking at confirmation of the reversal. This would be a situation to go short, or if you’re still holding a stock, it may be the time to sell. 

NOTE: A shooting star candle works best as an indicator after a long uptrend. Seeing a shooting star when a stock is trading sideways or already going down, carries less weight as an indicator.

October 2020: Investment Update

October 2020: Investment Update

My Investment Tracker – October 2020

From time to time I will be posting updates on my trading accounts. My P&L, current holds, and what I am thinking about moving forward. I am still in the learning process and trying out different strategies hoping to really hone in on 2 to 3 strategies that I can master. I started my IRA with $2800 in December 2018, and my brokerage account with $3500 in early 2020. Not included in the numbers below are my BTC holdings and general savings.

My IRA (US Dollars)

Brokerage Account

Below are the overall results from my past 60 days of trading. I had been cruising at around 90% P&L for a little while, but finally sold off some losing positions to start to bring my numbers back to a more normal range. I am still working on getting rid of losers faster, as you can tell.

Biggest Gainers (%)
$TSLA: +97%
$PLUG: +20.6%
$GRWG: +15.71%

Biggest Losers (%)
$PRVB: -30%
$SLDB: -22%

Long terms holds: $TSLA, $NOBL
Short term holds: $GE, $PLUG
Speculative play: $RLFTF – my first venture into penny stocks. We’ll see how this goes.

Lessons learned: Both PRVB and SLDB were dumb holds on my part. They didn’t need to be such big losses in terms of percentage. I think because I am still not playing with huge sums of money, I tend to let the losers go a while thinking “it’s okay, it’s only $x dollars, not too bad” but I have to be more disciplined and remember that every little bit counts. Most of the losing trades came from my brokerage account, which brought me back nearly to where it had started. 

Always do your own investment research. My website is not meant to be investment advice. It’s just a way for me to track and keep accountable as well as to share my knowledge and experience. 

60 Day Results - All Accounts