How to Read Candlesticks: Basic Trading Principles

Charts and technical analysis can be illustrated in various ways ranging from line charts to point and figure charts. A common format used in cryptocurrency trading, and indeed trading in general, is candlesticks. Let’s take at what is a candlestick chart, some common shapes and structures, as well as how to read candlesticks when looking at price action.

What is a Candlestick Chart?

The up-or-down fluctuations of a price can be represented in the form of a candlestick chart. Traders can see market trends through these. Rising prices are marked in green, and falling ones are marked in red. Candlestick charts can be represented with different time frames such as daily candlesticks, hourly candlesticks, and minute candlesticks.

To noone’s surprise, monthly candlestick chart represents the market trends over the course of a month, from the beginning of the month to the end. When switching to weekly candlesticks, every month can be divided into four weeks. To go further, a weekly candlestick chart is composed of 7 daily candlesticks (as the crypto markets are open 7 days a week), and so on. 

Each time frame may present drastically different movements as while the price during one day may have moved a lot, it may finish close to its open price and as such appear to have moved very little when looking at daily candlesticks.

Candlestick Components

Example: Upper left corner of the chart shows the number values of each component which match below.

Certain candlestick shapes help to dictate future price action. The key is to analyze the body and the wicks of the candles to gauge if buyers or sellers are in control.

Bodies and Wicks

The longer the body is, the more prominent the buying or selling is. Conversely, short candlesticks indicate little price movement and illustrate consolidation or sometimes indecision.

1. Long white candlesticks indicate that the buyers controlled the trading that session.

2. Long black candlesticks indicate that the sellers controlled the trading that session.

3. Small candlesticks indicate that neither buyers or sellers could move prices that trading session.

4. A long lower shadow (wick) indicates that the sellers controlled the trading session for part of the time but lost control by the end and the buyers took control.

5. A long upper shadow (wick) indicates that the buyers controlled the trading session for part of the time but lost control by the end and the sellers took control.

6. A long upper and lower shadow (wick) indicates that both the sellers and the buyers had their moments during the trading session but neither could overpower the other which resulted in a standoff/indecision.

Common Candles

Bullish
Bearish
Indecision

Bullish/Bearish (see Wicks)
Indecision

Bullish/Bearish

Bullish/Bearish

Indecision

Candlestick Chart Trends

Trends are used to describe candlestick chart patterns, usually correlated to the fall or rise of the price, with the high and low points of several small trends being linked together to form a larger trend. Down below are the three most common trends observable in charts.

Upward candlestick trends refer to when a chart has new low points being higher than previous low points, and new high points also higher than previous high points. They are generally self sustaining to a point as a they increase confidence in the market and thus the price and are represented by an arrow going up in charts.

Downward candlestick trends refer to when a chart has new high points lower than previous high points, and new low points also lower than previous low points. They are generally self-sustaining to a point as they decrease confidence in the market and thus the price and are represented by an arrow going down in charts.

Candlestick consolidation trends are a different type of trend. In them, the price is not consistently going in one direction but instead switches between going high and going low, with the high and low points being relatively close to one another.

The above picture is a clear example of an upward trend to the left followed by a consolidation trend in the middle before finishing with a strong downward trend on the right.

Indications that a market may reverse don’t always appear directly on the body of candlesticks. Instead it can be seen through the fact that shadows consistently appear in certain areas and consistently break through previous low, or high, points. These are good indications of a market reversal coming up and that one should enter the market. 

As the diagram below shows, the market has reversed at its highest point and it is recommended to enter it now at 4,054, place a Stop-Loss at 4,234 and a Take-Profit at 3,767.

* This content does not represent the views of Bybit. As such, it should be not be seen as trading and financial advice, it is merely an opinion. Trading is done at your own risk.

Now you know how to read candlesticks, why not try yourself using them on the Bybit platform?

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