Deciphering the Candlestick Charts - For Beginners

Updated: Dec 29, 2019

Disclaimer: The charts displayed are meant for educational purpose. None of the content contained here constitutes a recommendation to make any investment. I am not responsible for any loss arising from any investment based on any information contained here. Readers are expected to perform their own due diligence before venturing in any investments.


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Do you know how to read a candlestick chart such as the one shown in Fig 1. below?

Fig 1: A typical stock chart of the S&P 500 which is a stock market index (or a benchmark) that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

No? Then this post is for you and all the rest of the beginners out there. To understand the candlestick chart, we need to first understand what each candlestick means.


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Fig 2. below shows the anatomy of a candlestick. There are four key levels for each candlestick. The layman's explanation for each level is described below.

Fig 2. Anatomy of Candlesticks
  • Open (The starting price)

  • Close (The ending price)

The Open and Close are indicated at the ends of the body of the candle as indicated in Fig 2. A green body represents that the Close is above Open which means that the price has increased. A red body represents that the Close is below the Open which means that price has decreased.

  • High (The highest price achieved)

  • Low (The lowest price achieved)

The High and Low are indicated at the extreme ends of a candle stick in the upper/lower shadow zone as indicated in Fig 2. The longer the "tails" of the candles are, the greater the price rejection shown at the High & Low.


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Each candlestick can represent different time frames. Typically, they exist in regular time intervals such as Hourly, 4-Hourly, Daily, Weekly and Monthly. The 4-Hourly candle is made up of 4 Hourly candles, the Weekly candle is made up of by 5 Daily candles (for standard stock markets) and the Monthly candle is made up of 4 Weekly candles.


Fig 3. below shows how a Weekly candle is derived from 5 Daily candles.

Fig 3. Candlesticks of Daily / Weekly time frames

As you can see from Fig 3., the Weekly candle gives a bigger picture of the direction of price movement for the entire week but does not tell you the details of the daily price fluctuations within. This can only be analysed through the Daily candles.


There is no right or wrong time frame to trade on the candle stick charts. If you are a short term trader, obviously a shorter time frame will be better. Some traders employs multiple time frames and will require all time frame charts to be confluent to the trading strategy before they trade. Some just trade based on one fixed time frame.


As Deng Xiaoping famously said "It doesn't matter whether a cat is black or white, as long as it catches mice."


Personally, I prefer to look at the 2-Day & Weekly candles when analysing charts because this allows me to avoid market noises and gaps which appears frequently in the Daily candles. The lower the time frame, the greater the uncertainty but the quicker the rewards.


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There are several other variations of how a candlestick looks like as shown in Fig 4. below.

Fig 4. Various candlestick patterns

As complicated as they seem, just keep in mind the following:

  1. There are 4 key levels (Open, Close, High, Low);

  2. The colours of the candlestick bar (lighter colour means price went up, darker colour means price went down);

  3. The time frame (E.g. Hourly, 4-Hourly, Daily, Weekly, Monthly) of the candlestick chart,

and you should be able to master the candlestick charts in no time! Booyah!


Stay tuned for more advanced use of the candlesticks in my future posts by connecting with me via Facebook to receive the latest updates.


Remember that reading candlesticks is just one way to understand the charts but should not be traded off singularly. It is much wiser to use other indicators/price action confluence to attain higher probability trades with greater expectancy.


If you wish to see my trading journal, click here for more. Thanks for viewing!

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