– LESSON 1 –
UNDERSTAND THE BASICS OF CANDLESTICK CHART
What is a Candlestick Chart?
A candlestick chart, also known as the Japanese Candlestick Chart, is a style of financial chart that is used to describe the price movements of an asset. It is used in financial markets, stocks, cryptocurrencies or any other market.
Let’s see how it looks:
Probably, you are wondering what are these green and red things going up and down? It’s candlesticks (also known as Japanese Candlesticks). Don’t worry, you will learn how to read the charts as an experienced trader. It’s just a matter of time.
Now, let’s learn How to Read a Chart.
When looking at the charts, the price movement of an asset is represented from left to right (from past to present).
To make things easier, I will show you a linear chart drawn by me.
Here is the chart:
At the bottom of the chart, we have the TIMEFRAME, and at the right side of the chart we have the PRICE level.
Now, let’s see what the price was on the 7th of June.
On 7th of June, the price was $8 USD.
Let’s take another example just to be sure you understand it clearly.
What was the price on the 12th of June?
If you answered $5, then you were right!
On a candlestick chart, the price isn’t represented just by a line, but by using candlesticks.
Let’s get back to the last example. I asked you what the price was on the 12th of June. Yes, it was $5, but this was the average daily price. The price can’t stay at $5 all day long. It’s moving continuously, so it cannot be represented in detail by a line.
We need to obtain more information …
The price is moving up and down every second, depending on supply and demand. Let’s assume that on the 12th of June, the price varied from $4 to $7 (range), meaning that we had a LOW of $4 and a HIGH of $7. Using a linear chart, you won’t be able to see such information. For such information, we need the candlestick chart.
Most of the traders use candlestick charts.
Now, let me show you the price on 12th of June represented with a candlestick.
Because we are using the daily timeframe (D), every candlestick on the chart shows you the OPENING and CLOSING price for each given day. Also, it shows you the LOWEST and HIGHEST price of that day.
Now, let’s have a look at the price action that happened ‘inside’ of a daily candlestick. You will understand better how a candlestick takes shape.
Please take a look at the example bellow:
When a new day starts, at 0:00 AM, a new candlestick will OPEN at X price. During the day, the price goes up and down setting a LOW and a HIGH. At the end of the day, 23:59 PM, the candlestick CLOSES at Y price.
Having all the information above, we can now see how a candlestick is formed.
See the example below:
Now it’s clear that a candlestick represents the price movement on a specific period (timeframe). You will get more familiarized with this topic later on when we’ll talk in detail about candlesticks.
Candlesticks can be displayed on the charts in different time frames, from monthly, weekly, and daily, all the way down to less than a minute of data.
The most used trading time frames are the following:
- M – Monthly
- W – Weekly
- D – Daily
- 4h – 4 hours
- 1h – 1 hour
- 30m – 30 minutes
- 15m – 15 minutes
- 5m – 5 minutes
You can switch between time frames at any time. All trading platforms give you this feature. Just click on the specific time frame you want to be displayed. It’s real-time switching.
Here is how it looks on a trading platform (Tradingview):
Remember, you can switch between timeframes, at any moment, with just one click.
Now, let’s see the differences between a linear chart and a candlestick chart.
This time we are using the 1-hour timeframe (1h). The linear chart shows the average price for any past hour. The candlestick chart gives you more details like: the price range of every past hour, the Opening and the Closing price of every past hour, or the Lowest and the Highest price of every given hour in the past.
The linear chart looks like this:
The candlestick chart looks like this:
When switching to 1h-timeframe, every candlestick on the chart represents the price range of every past hour.
At 0:00 AM, the price opens a new candlestick which closes at 1:00 AM. Right after it closes, a new one opens from 1:00 AM and closes at 2:00 AM. Then another one is formed from 2:00 AM to 3:00 AM, and so on…
So, when using the 1h timeframe, on every given hour a candlestick is formed by its opening and closing price. This is how the chart is formed by candlesticks.
See the differences between the linear chart and the candlestick chart?
On the linear chart, you cannot see the price range on a specific timeframe. It only shows the average price. On the other hand, the candlestick chart shows a lot more information about price action at a specific time in a the past.
Speaking about price action, let me show you the candlestick chart again, but this time I will indicate the price action using black lines. As we already know, we are looking from left to right (past to present).
Let’s look at the chart:
See what I mean?
I’m sure you have understood the whole picture. The price came from left to right, showing ups and downs.
Don’t worry if something is unclear because I will explain everything in details when going further with this trading lessons.
When trading, all the information we have is from the past (left side). Based on this information, we are trying to predict the next move of the market in order to make profit. This ‘prediction’ is made by Technical Analysis (TA).
But trading isn’t about prediction, it’s about reaction. So what I am trying to say is that we don’t open trades based on our prediction but we open trades if the market reacts to our prediction.
Now, let’s talk about price action…
Why does it go up and down?
As I have told you earlier, the price is moving because of supply and demand, but not just because of that. Markets are also driven by emotions, greed, and fear.
Let me give you a short general example:
Imagine you want to sell a product. As a seller, you want to receive as much money as possible, but the buyers want to pay as little as possible. So, the selling price is always higher than the price offered by the buyers.
If five people sell the same product and they ask for $100, the following scenarios can happen:
1. Lack of demand:
Let’s say we have only one person interested in buying the product for $95. Rest assured that one in five sellers will sell the product for $95, lowering the price of the product from $100 to $95. Now the market price is $95.
2. High demand:
Let’s assume that many people are interested in buying the product. The sellers, seeing high demand in the market, start asking for a higher price. They won’t sell the product for $100 anymore so the price starts to increase.
In conclusion, every time there is an imbalance between buyers and sellers (supply and demand) the price will increase or will decrease.
I have used this example so you can get an idea of what influences the price to go up and down. At the same time, there are fundamental causes for which the price varies, like the economy, the news, and so on …
We will focus on how to trade by using Technical Analysis (TA), not Fundamental Analysis (FA).
We will be discussing more when we get to the next lessons…
Before ending this lesson I want to show you a chart and to highlight all the information given by it.
Let see the whole picture:
- Name of the asset that we want to trade.
- Selected timeframe.
- Last candlestick info: Open, High, Low, Close.
- Current price level.
- Price scale
- Time & Date
Congratulations, now you know how to read candlestick charts.
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