One of the key processes of any trading activity is reading the charts that show the price movement of commodities, securities, or other assets during a specified period of time. They are an integral tool for traders to decide their next move — whether to invest in an asset or stay away from it, whether the asset has been stable or volatile in the past. These charts even give an insight into whether the asset is likely to rally, crash, or stay where it is in the near future. There are several forms of charts. One of them is a “candlestick” chart. It is widely used in cryptocurrency trading and all investors should know how to read it.
The candlestick chart requires training to decipher. There are candle-like patterns drawn on this form of a chart. Knowing the complex terms behind these patterns is the first step in making an informed decision when trading in the speculative cryptocurrency market.
Each candle drawn in this chart has three parts: Body; Upper Shadow; and Lower Shadow. The body can be of red or green colour and a line (called wick) on either end denotes the shadows. The time period a candlestick chart represents can vary widely for each chart.
Each candlestick carries four points of data in it:
1) Open: The value of an asset when trading opened.
2) High: The highest traded price of the asset.
3) Low: The lowest traded price of the asset.
4) Close: The value of the asset when trading closed.
Green candles: It means the price of an asset has gone up, so the open price is at the bottom and the close is at the top. Red candles mean that the price of an asset had dropped during the specific period, so the candle is inverted — open is up and close is at the bottom.
Body of a candle: It tells the open and close prices during the specific period of trading. It helps traders see the price range of the asset during that period. For example, if a candlestick chart for one month shows more consecutive red candles, it means the price has been falling.
Also, candles with short bodies mean little price movement. On the other hand, candles with long bodies mean strong buying or selling and a lot of price movement.
Shadows (Wicks): These are vertical lines that show the lows and highs of the traded price. If the wick above a red candle is short, this means the trade opened near the high of the day. Similarly, if the wick above a green candle is short, it means the stock closed near the high of the day.
Key trading patterns
Over a period of time, everybody develops a specific way of reading these charts. But most people like to understand how to recognise patterns quickly. This is because patterns show the price direction, trends, and overall momentum of an asset. In simple terms, patterns give a fair understanding of whether the market is bullish or bearish.
Hammer: A Hammer (a short body with a long lower wick located on a downward trend on a chart) and an Inverted Hammer usually represent a bullish market. There are some others like Morning Star and Bullish Engulfing that also suggest a bullish market.
Shooting Star and Hanging Man: A Shooting Star (a short body with a long upper wick) and Hanging Man (similar to the Hammer pattern but located on an upward trend in a chart) mean a bearish market. Some other patterns denoting a bearish market are Evening Star and Bearish Engulfing.