You may ask how to read candlestick chart for trading. Candlestick chart is a powerful technical indicator for traders to take immediate decision. This chart is one of the best and widely used trading charts.
This Japanese candlestick chart has bright history. Technical analysts love this chart very much. Candlestick patterns are easy to read. Although it has many pattern names, I only focus most widely used patterns.
You just need to know how candlestick chart works to take buying and selling decision. From the name, you can guess that candlestick chart makes up candle. Candles are easy to read and perfect for eyes catching.
In the above image, you can read a company’s candlestick chart. This is very helpful for day trading. By reading the whole article, you will learn how to read candlestick chart for trading. So, carry on your reading!
How does candlestick chart’s each candle indicate?
At first, you have to understand bull and bear candle. In this post, red color candle will show as bear candle and green color candle will show as bull candle.
What does mean bear candle?
When open price starts to decrease, bear candle starts to create. That means, price is downward trend . Bear market also indicates downtrend market. In many charting software, bear market candles are shown as red color to highlight.
What does mean bull candle in candlestick chart?
When open price starts to increase, bull candle starts to develop. Bull candle indicates increasing price. A stock has five types of price for technical analysis.
Yesterday’s closing price, today’s opening price, today’s closing price, today’s highest price or today’s lowest price. Candles are formed by using today’s open price, today’s closing price and today’s highest price or today’s lowest price.
Suppose, opening price of R.S company is $ 50. Then price is rising to $52. Closing price is $55.That indicates bull market. At the end of the trading day, if price remains at $55, it creates a bull candle with opening price at $50, closing price at $55 and tail height at $55.
The body of this candle remains between $50 to $52. This candle solid color is green. On the other hand, If R.S company’s opening price starts at $ 50, it has decreased toward $45 and closed at $48, it creates a bear candle. This bear candle body is formed between $50 to $48 and downward tail height is at $45 .
What does body indicate?
Body is formed between opening and closing price. Difference of the opening and closing price indicates height of the body. Body also indicates how much price has increased or decreased.
What does tail say?
Another factor is tail. Tail indicates highest or lowest price of trading day. Generally, stock doesn’t close at day’s highest or lowest market price. Hence, tail cannot create body. If you have understood the above discussion, you have learnt the formation of each candle.
What is stock volume ?
Volume is the number of shares trade in a trading day. A bear or bull candle has formed with a number of shares. Generally, volume shows as million. What does it happen to a candle if opening and closing price remains the same?
When a candle’s opening price and closing price are same, it creates a neutral candle. This candle doesn’t have body but it may have tail. In some cases, it may not tail or even body.
How to apply candlestick chart for buying or selling decision
Candlestick chart is easy to understand and easy to apply for making buying and selling decision. Generally, traders use charting techniques. They have to take quick decision. So, candlestick chart becomes a favorite chart for them.
1. Entry Point in candlestick chart
When candle starts to uptrend from downtrend, traders wait to take buying position. Entry techniques vary from traders to traders. Day traders may put buying order when candle starts to green and exit before another candle starts to red.
They also sell short when candle becomes green and buy when candle becomes red. Day trading strategies don’t suit for other trading. On the contrary, swing trading strategies are different from day trading. Swing traders observe the stock carefully.
They wait for right time. When trend is reverse from downtrend to uptrend and if this trend is confirmed to continue, then they will entry to buy. You can trade trend reversal or convert day trading into swing trading by confirming the trend.
2. Exit Point in candlestick chart
Exit point is the opposite of entry point. When should a stock sell? At first, you should make up your mind for the golden rule of stop loss. You should not sell an up trend stock. On the contrary, you should not increase loss. Right time to sell a stock when its uptrend price reverse or cross your stop loss level.
When a stock price is soaring up, you should wait until this stock turns opposite direction. When opposite direction starts, you should sell. But, before putting selling order, make sure that it is the right time to sell.
If a stock change its up trend direction with a huge volume, you should exit the trade. When your trade goes wrong direction, sell as early as possible. Never make mistakes to hold a downtrend stock.
3. Neutral Point in candlestick chart
Neutral point happens when candlestick chart shows candle without body. In this point, buyers and sellers remain undecided position. In the bear candle, the stock is in sellers’ control.
Buyers have to increase price to buy the stock. As demand increases, stock price goes up trend. On the other hand, bear candles occur when the stock is in buyers’ control. As supply increases, buyers decrease price to buy stock.
This stock price starts to move downward. But in neutral condition, neither buyers nor sellers can control the market. In this situation, you should wait to watch the next movement.
Because, stock price may move up or down at any time. Just confirm the market trend and take your buying or selling decision.
In this article, you have learnt how to read candlestick chart for trading. Candlestick chart is a powerful technical indicator for traders to take immediate decision.
Before applying this important indicator, you should learn how candlestick chart works. You can know instant movement of a stock, if you keep an eye on candlestick chart.