How to Read Candlestick Charts for Beginners? 2023

Candlestick charts are a powerful, yet simple tool for understanding market direction. But what if you've never seen a candlestick chart before? Worry not! This blog post will take you through the basics of how to read this financial indicator(candlestick chart) for beginners.

Candlesticks are used to show the difference in price movements between opening and closing values over a certain period of time. If you are trading without looking at price charts, you might think these candles are just a simple way of showing the high and low value of a stock. But if you see them properly, you will discover that they contain much more than that.

The demand and supply of a particular stock are represented by the open and close values shown on a particular candlestick. If the opening price of a stock is higher than the closing price, it means there was a demand for that stock. If the closing price of a stock is higher than its opening price, it means supply surpasses demand.

Let us understand this with a simple example. If you see a candle that has an open value of Rs 100 and a close value of Rs 110, it means that there was a demand for that particular stock on that day. The market opened at Rs 100 and moved up to Rs 110.

Types of Candlesticks

Basically, there are 2 types of candlesticks, green and red. However, both of these types of candlesticks contain only one real element, i.e., the high or low value.

1. Green Candle

Green Candle represents the closing price at the end of the time period is higher than the opening price.

2. Red Candle

Red Candle represents the closing price at the end of the time period is lower than the opening price.

Let's understand this with the image below:

Candle Body

The filled portion of a candle body green/red represents the opening price and the closing price. In a green candle, the upper end of the candle body is the closing price. Whereas, in a red candle, the lower end of the candle body is the closing price.

Candlewick

There's an upper shadow and a lower shadow in a candle that represents the wick of the candle. This refers to the range of price at which stock was traded over a particular time period. The upper shadow is represented by the part of the candle that lies above the opening price. Whereas, the lower shadow is represented by the part of the candle that falls below the closing price.

Candlestick Chart Patterns

There are different types of patterns you can see on a candlestick chart. Candlestick patterns are displaying price information in a market.
- Bullish Patterns
- Bearish Patterns

Bullish Patterns

1. Hammer

When there is a downward trend in stock, the opening and the closing price are equal to one another or any small gap between them. To represent this well, we use a hammer chart pattern. This pattern is also called the close-in pocket pattern, as it resembles breaking out of an old pocket with insufficient money to cover the entire bill.

2. Inverted Hammer

The Inverted Hammer candlestick pattern is very similar to the Hammer pattern, but it's a reversal candlestick pattern. This means that when a stock is in an upward trend, the opening and closing values are almost equal to one another due to sellers have pushed the prices downwards.

3. Morning Star

The Morning star pattern is formed when there is a bullish trend in the market. This pattern can be found both in a bullish and bearish market. In a bullish candlestick chart, one candle (green) is followed by a red candle that has a small body with an engulfing pattern. The close value of the red candle should be between 90 to 100 percent closed-value of the green candle.

4. Doji

Doji is a candlestick pattern that shows indecisiveness in a stock. It can be formed when the open and closing price of a stock is equal to each other or any small gap between them.

5. Piercing Pattern

When there is an upward trend in stock, the opening and closing price of a stock is equal to one another or any small gap between them. To represent this well, we use a piercing pattern. This pattern is also known as the Doji star.

Bearish Pattern

6. Evening star

The evening star candle shows that there was a strong demand for a stock and supply was met at an earlier point of time during the day.

7. Shooting Star

The shooting star is similar to the evening star, and it is formed during a strong downward trend. It has a short body with a long upper shadow. It's generally seen when the trend is upward, which represents that it will crash like a shooting star.

8. Hanging Man

The Hanging Man pattern is formed when there is an upward trend. This is a bearish reversal candlestick that has a long lower shadow. This means that there was an upward trend in the stock's price and then it reversed. The long lower shadow of the candle shows that sellers pushed down the prices of a stock and now bulls are not able to push further.

There are more candlestick patterns, such as Engulfing, Harami, Dark cloud cover, etc.

So, now you have a basic idea about the candlestick chart. Now let's learn to read the Candlestick chart.

How to Read Candlestick Chart? 2022

Before making a trade in the stock market, it is essential to analyze the candlestick chart because it gives you a fair idea of how the stock is moving and where it may be headed. If you want to be a successful trader, then you must know how to read a Candlestick Chart.

1. Select the Particular Time Period

The first thing you have to do in the chart is to select a particular time period for which you are looking. Selecting a particular time period is totally based on the type of trading you are doing. 

2. Add Moving Average Indicator

After selecting the time period, the next thing you should do is to add the moving average indicator. Moving Average Indicator refers to the average of a stock over a certain period of time. 

For example, if you want to buy a stock with 100 days moving average, then you should enter 100 in the moving average box.

There are many different types of moving averages that can be used in candlestick charts. However, historically the simple 20-day and 50-day moving averages have been quite popular for many trading strategies. They work well to confirm trends in stock prices and help to identify the beginning of trends.

3. Selecting Stocks

Now you will have a clear idea about the trend of the stock. If you want to buy a stock then you must look at the moving average that should be upward trend then you can see how the stock price in the moving average is moving higher. Similarly, if you want to sell a stock then you must look for different signals such as a downward trend. 

4. Decide Entry, Stoploss, Target, and Quantity

After you have decided the time period, the moving average, and the stock that you want to buy, then it is time to decide on the price entry. You must buy above the green candle that looks bullish and Stoploss below the last 2 candles low. Target should depend on the time period you are trading. You should use 10-15% of your total capital.

Frequently Asked Questions(FAQs)

There are several other candlestick patterns that you can follow to understand trends of the market and the sentiment of the markets.

With Candlestick charts, you can find better entry and exit signals and make money in the stock market. Candlestick charts utilize the power of technical analysis in a simple format to help you quickly identify market trends and buy/sell opportunities. The combination of candlestick charting techniques has proven to be an effective method for analyzing data and making trading decisions.

There are several other candlestick patterns that you can follow to understand trends of the market and the sentiment of the markets.