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How To Read Candlestick Charts

Learning how to read candlestick charts helps investors become better at trading using technical analysis. For traders who don’t already understand these patterns and what they can reveal, we’re ready to help. Traders can review this comprehensive guide to candlestick charts to add yet another strategy to their investing toolkit.

How to read candlestick charts:

  • Check the color: A green, blue, or white candle indicates an upward-trending asset, while a red or black candle is used to designate an asset that’s trending downward over the measured period.
  • Find the indicated prices: Each candle on a candlestick chart indicates the high price, low price, close price, and open price for the time period in question.
  • Review price direction: Look at the candle’s placement on the chart to gain information about its price direction compared to previous time periods.
  • Determine the range: To assess the price range over the time period, look at the candle’s wicks (or shadows), or subtract the period’s low price from the period’s high price.
  • Look for patterns: Traders who use technical analysis rely on single-candle and multiple-candle formations to glean additional insights about the stock or asset.

What Is a Candlestick Chart?

Image via Flickr by wuestenigel

A candlestick chart is a technical analysis tool that offers a wealth of valuable information about a stock or asset in an intuitive, easy-to-read design. Traders can use these charts to predict potential price movements based on their assessments of past patterns.

With a candlestick pattern, each time period on the chart is represented by a single rectangular ‘candle.’ Each candle indicates the asset’s high, low, open, and close prices for the specified time period, which can be as small as five minutes or as long as a full day.

Many investors use a daily candlestick chart to see how their target asset changes from day to day at a glance. Candlestick charts illuminate the asset’s price range and trend for the period in question. Traders can use the following steps to learn how to take advantage of a candlestick chart.

Check the Color

Most charts use a green, blue, or white candlestick to indicate an asset that’s on a positive trend and either a black or red candlestick to notate a downtrend. During the time period in question, the candlestick may change color. The chart shows the final color only when the time period for that candle has ended. As soon as one candle is complete, the formation of the next candle begins.

Find the Indicated Prices

When investors look at a candle on a candlestick chart, the open price typically appears on the bottom of the candlestick if the asset is trending up and on the top if it is trending down. The asset’s high price for the designated period lies at the top of the candle’s wick, which looks like a shadow or tail above the rectangle. When the high price matches either the open or close price, the candle is wickless.

Look at the tail at the bottom of the candle to find the stock’s low price for the period. As with the high price, there will be no tail if the low price matches either the open or close price.

On a green, blue, or white candle, the asset’s close price for the designated period appears at the top of the candle. In comparison, black and red candles show the closing price at the bottom of the candle.

Review Price Direction

In addition to the trend information that traders can glean from a candlestick’s color, its placement also provides details about the trend for that time period in relation to previous periods. When a stock opens higher than the closing price for the previous period, it will appear to the right and above the previous candle on the chart. A stock with a lower opening price than the previous closing price has a candle that appears below the last candle and to the right.

Determine the Range

Investors can find the stock’s price range for the given period by subtracting the low price from the high price. They can also measure the distance between the upper wick and the lower tail of the candlestick. Generally, the longer the candle, the higher the buying or selling pressure for that particular asset. A long red or black candlestick signifies strong selling pressure, while strong buying pressure shows up as a long green, white, or blue candle.

Look for Patterns

Now that we’ve discussed the basics of how to read candlestick charts, it’s time to learn how to read candlestick patterns. Looking for specific formations on a candlestick chart can inform smart trades.

Single-Candle Formations

Even a single candle can reveal important information about a target asset. One of the most common single-candle formations is the hammer, which often signifies an upcoming trend reversal. A hammer candle is characterized by its small body, a long lower wick, and an opening price below the closing price. If a trader notices a hammer on their chart, smart actions to take may include:

  • Exiting a short position.
  • Tightening the reins on a stop-loss.
  • Buying shares of that specific stock.
  • Executing a long trade after the hammer closes.

Investors might also notice an inverted hammer candle, which looks exactly like an upside-down hammer. This pattern usually signifies support or trend reversal. Before using the inverted hammer to make trade decisions, make sure to find a bullish confirmation like a gap up or a long uptrend candlestick after the inverted hammer.

A spinning top is a small-bodied candle with a long top wick and a long lower wick (shadow). This type of candle reflects indecision in the marketplace, indicating little change from open to close and significant volatility during the measurement period. When a spinning top shows up after a long positive candle or negative candle, it usually foretells a reversal in trend.

Multiple-Candle Formations

Traders can also look for price patterns created from multiple candlesticks. One such chart is the bullish engulfing pattern, characterized by a red or black candle immediately followed and completely engulfed by a blue, green, or white candle. In other words, the upward-trending candle covers the same area as the downtrend candle and then some. Actions to take after noticing a bullish engulfing pattern may include:

  • Waiting for the second candle to close, then entering a long position.
  • Placing a stop-loss under the low point of the candlesticks.

Another bullish pattern to look for is the three-line strike reversal. This chart has three downtrend candles in a row, each closing near the chart’s intrabar low, and each with a lower low and lower high than the last. The fourth bar in the pattern has an even lower opening but closes for the day above the first candle’s high price. When investors see this pattern, they can reasonably expect a reversal with higher prices on the horizon.

A candlestick chart may also form a piercing line, a two-stick pattern in which an uptrend candle with a long range immediately follows a downtrend candle with a long range. The piercing line also features a gap between the closing of the first candlestick and the opening of the second candlestick, which traditionally highlights strong pressure to buy the asset in question.

In a bleak market, savvy traders keep an eye open for the morning star candlestick pattern. This three-stick pattern consists of one short candle that pops up between a long downtrend candle and a long uptrend candle. The shorter candle, known as the star, should not overlap with the two longer candles since gaps on the market open and close distinguish this pattern and indicate the rise of a bull market.

The evening star is the morning star’s counterpart. It shows up as a short candle between a long positive candle and a long negative candle. This signifies an upcoming downtrend.

After a downtrend, investors may notice the three white soldiers pattern, indicated by three long positive candles with increasingly higher closing prices and opening prices. The ‘soldiers’ usually have short top and bottom wicks. This pattern indicates a strong increase in buying pressure, although it can also be a red flag for short-selling activity that will result in a price decline.

Once a trader becomes familiar with candlestick charts, they will be able to spot even more patterns that clue them into market movements. Knowing how to read candlestick charts is a key skill for any technical investor.

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

How many times have you come into a trading day without preparing ahead of time?

I mean I can tell you a lot of traders do…

I’m going to be honest with you… I’ve done this too many times to count when I first started to trade. Of course, my account did take some hits because I wasn’t prepared.

I don’t want the same to happen to you, especially right now.

That said, my turning point was finding a strategy that works for me and learning to prepare in advance. 

Since then I have never looked back.

Now, I make it a daily habit to be prepared. It’s a key reason why I stay on top—while other traders struggle.

A big part of that is creating a watchlist the night before, which gives me a huge advantage.

If you can’t commit to making this a daily habit, or just don’t want to… I actually provide my subscribers with video watchlists… so they know exactly what the plan is on any given day.

But listen, it’s not actually that hard to put together a watchlist yourself.

In fact, it’s so easy to do, I am going to show you how to create one, along with how to use it… 

The What and Why of Watchlists

First the what… a stock watchlist is exactly what it sounds like. A list of stocks that you are watching. In this case you are watching the stocks for potential trade setups.

For that reason, you don’t want a list full of a bunch of random stocks. You want it full of stocks that are ripe for trading. 

And in my case that means stocks that could possibly present good trade setups the very next day.

And the Why…

There are simply too many stocks to keep track off, way too many. So what will you do in the morning if you are starting from scratch?

Most likely you’ll end up overwhelmed and anxious and pressured to find something to trade as quickly as possible creating some forced trades… and inevitably missing some great ones.

You always need to have a plan going into the day and having a watchlist is at the root of that plan.

It’s my way of getting a head start on the trading day.

How to Create a Watchlist

First, you always need a trading system/ strategy or you shouldn’t be trading at all. Let’s assume you do (if not click here)

When you have a strategy, you know what you are looking for to make a trade. So it’s easy to put together a watchlist. In fact, it only takes me a few minutes each night.

The biggest part of my watchlist will come from my criteria scan. Knowing the criteria for my trades, I am able to run a screener that pulls up matching stocks in a matter of seconds.

Some of the things I scan for:

    1. High percentage movers – this is a big one in penny stocks
    2. Higher than average volume – tells me there’s interest
    3. Breakouts – One of my favorite trades is the breakout, so I will be watching for stocks that just broke above consolidation, a previous high, or are trading close to those levels
    4. Chart patterns – I use a number of chart patterns in my trading setups. When creating a watchlist, it is good to keep an eye on stocks that have formed or are forming those patterns. (learn my patterns here).

For more insight on using scans, check out my post about scanning for trade setups

After entering your criteria, the screener will come back with a list of stocks matching your inputs.

From there, you need to narrow it down to the stocks that are best set up for trading right now.

And that’s as easy as looking at charts… sounds time-consuming, but it’s not. With your scan completed, you just scroll through the list looking for your patterns.

Below is an example of my scan results. There are only 20 stocks on the scan and as you can see there are 9 charts on one screen and a scroll bar on the right. 

So it really is as easy as just scrolling through the charts.

With that, I have the base for my watchlist.

But I don’t want to miss anything, so I check a few more places before finalizing my list.

  1. Stocks in play the day before – you just finished trading… that alone should produce at least one good candidate to watch tomorrow.
  2. Don’t be afraid to go back to another recent watchlist to look for new setups
  3. Stocks you trade well… or had recent good trades in is another good place to look
  4. News – this is a good one to potentially find catalysts for the next day… I don’t spend much time on this myself as I believe the charts will tell the story… for example- if a catalyst has legs, it will be a top percentage mover, show high volume and break out… all things I look for in my scan.

Now it’s time to make the list.

This is key… Don’t just write down the symbols. What happens in the heat of the moment when you pull up the stock and it’s moving, but all you have is a symbol on a piece of paper?

View the watchlist as your preliminary trade plan, and treat it accordingly.

Add important price levels, chart patterns, where a breakout would occur, where the next resistance is at, where support is etc… 

What do you need to see in order to make a trade?

Having a watchlist is so critical that I make one every day and send it out to my members every evening.

And to make it even easier for them… I do this in video format so I can quickly walk them through the charts, and talk about the detailed plans for trading each stock, get access here.

As you can see in the above image, it’s only a few minutes long so it won’t take all night to get prepared for trading tomorrow. A few minutes each evening and you’re ready to go.

Putting It To Use

First off, keep it on your screen where you are always aware of the stocks. Depending on your broker, there are all sorts of boardviews and ticker boards etc.

Just enter all of the watchlist stocks into one window so you can see the price and changes all in one place. And with a mental note on price levels, you can pretty much know if it’s getting to an area of interest or not, just with a glance.

Second… Set Alerts! 

Something as simple as an alert can save you from missing a massive trade while you place your next order for Grim Bean Coffee on the internet… 

… and save everyone at your next happy hour from hearing the story of how you missed the perfect trade.

And guess what? They won’t believe you anyway… so just set the alert.

This should go without saying…but use your watchlist to make trades according to your plan.

You spent the time to find the right stocks to watch. You created a plan for each of those stocks. 

Now show the patience to wait for the right setup. Only trade the stocks that actually set up according to your plan.

There will be days where none of them do and days where you have too many setups to take them all… but either way, with the watchlist we are always ready.

By using a watchlist, I am able to find trades like this one in ENZC. After breaking resistance ENZC made a nice pop, doubling in the matter of a couple days…

Now I didn’t get that full gain myself. In fact, I’m not even trying to get every last cent from a trade.

It’s not about being greedy…it’s about taking high probability setups that give me a good chance of cashing in quickly on big moves.

And that’s what I was able to do with ENZC. 

And having ENZC on my watchlist was key to getting into this trade.

First off, I have the stock in front of me knowing it could give me a trade, so my eye is on it.

And most importantly I have a plan for it. I know what levels I like and what I want to see. So when it happens, I’m ready.

By scanning for stocks matching my trade parameters and adding them to a watchlist for the next day, I am able to find trades like this… and stay consistently profitable even when the overall market isn’t.

In fact, my strategy has produced triple and quadruple digit returns in my multiple small account challenges over the past few years. Earlier this year I took a tiny $500 account and turned it into over $10,758…in just 58 trading days.*

Get access to my trading strategy, nightly video watchlists, live trading room, and superior live daily training, and so much more… Sign Up for Stock Profit Pro Now

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

The markets are closed tomorrow, so let’s make it count today.

I’ll keep it short and sweet with the idea of focusing on what’s setting up going into the afternoon trading session…

Check out my list of stocks I’m watching to potentially grab some gains before I’m sitting back relaxing with my family, watching some football, and eating some great food.

I hope you enjoy the Holiday…and your break from the markets.

Without further ado…

 

Guardian Health Sciences (GHSI)

 

After a long downtrend, GHSI formed a little cup-and-handle breaking out of that on the 19th.

Today the stock is up a little over 7%, nearing the previous high of .262…

Will we see strength in the close to push it through, or will the stock take a breather to set up another day?

Next chart highs at .274 and .355.

 

 

To see what I’m trading live…

Join me in my Stock Profit Pro – Live Trading Room, as I walk my members through my trades and what I am watching every day.

 

Applied Optoelectronics Inc. (AAOI)

 

AAOI is trading into the gap today.

I’m watching for continued strength with a pick-up in volume.

With the 50-day above at 9.80, there’s some room to that level.

But I will need to see how it’s acting towards the close.

It’s the day before a market holiday, so be careful about jumping into trades with no volume confirmation.

You could get caught in a false breakout.

It’s a good day to be patient and sit on your hands if you don’t see what you want.

You can learn a lot by watching…

 

 

NF Energy Saving Corp. (BIMI)

 

BIMI is breaking out of the recent consolidation range and currently trading near the intraday high.

I like a good breakout, however I am watching the volume levels here. It’s not exactly a big spike, which worries me.

Something to keep on eye on going into the close.

Above we have the 200-day at $2.38 and a previous spike to $2.70 as resistance levels to watch.

And again, without a good increase in volume, be careful of false breakouts today…

 

 

 

At the end of the day, it all comes down to the demand levels increasing enough to push the stock’s momentum, will we see it or not…

Don’t waste anymore time wondering how to spot good momentum trades.

When it comes to the specifics of what gets me into a trade…

I teach it live Every Day in my trading room…but not only am I teaching it, I actually take my trades right there… walking my members through each step… all live.

Get your trading moving forward… Join Stock Profit Pro Today

 


 

Afternoon Watchlist

 

COCP     +47%

TOUR     +29%

ACST         +25%

PGEN        +17%

KODK        +16%

 


 

To get the most out of your trading, you need to be in my Live Trading Room.

This is where I spend the majority of my day…trading, teaching, and having fun with over 1,000 members.

Learn the strategy, see it live, trade with friends, and do it every day…

Join Stock Profit Pro Today

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.