The futures market can seem daunting when you’re first starting your trading journey. Trading, however, is more than just confusing charts with indecipherable lines and strange indicators. It all begins with understanding candlesticks. And, no, we aren’t talking about the wax candles your great-great-grandparents used to light their living room. We’re talking about candlestick charts that reveal market price movement. Once you start to understand market candlesticks and how they work, it’ll be easier for you to read and interpret the charts.
Naked price action is critical information for any trader. It tells you exactly what the price is doing at any given time. The price action dictates what’s going on in the market. It’s important to remember this. but how can we visualize and track price action as we prepare to trade? That’s where candlestick charts come in to play.
Types of Market Candlesticks
A chart is made up of lots of individual market candlesticks. There are several types of candlesticks, but let’s take a look at bullish and bearish. You can often see green and red bars scattered all over charts. What do they mean? How do you interpret the market’s activity through these candles?
A green candle represents a bullish market. A bullish candle means that the price has increased over a given period. Remember: green means positive price movement.
A red candle typically signifies a bearish market. This means that the price has decreased over the period. The market is down. Remember: red means negative price movement.
If you’re looking at a 5-minute chart, each fully-formed candle represents 5 minutes of price action. An hourly chart means that each candle represents an hour. A day chart signals a day’s worth of activity, and so on. These timeframes play a pivotal role in helping us determine when and how we should enter a market.
How To Interpret
Traders garner information from these candles. They tell you all you need to know about what’s happening in the market.
The rectangular part of the candle is known as the “Real Body.” It shows us the specific price action relating to the opening and closing price.
In terms of the bullish candle, the bottom of the body shows the opening price, while the top shows the closing price. Bearish candles are the exact opposite. The bearish candle’s top is the opening price, while the bottom is the closing price—since the bearish candle is displaying a price decrease.
When looking at charts, you’ll often see candles with vertical lines stretching on both ends. These vertical lines are referred to as the wicks of the candles. The wicks indicate the highest and lowest price of the period. The price would have touched the very top and the very bottom of the wicks as the candle was forming for closing. This is invaluable information for a trader as it gives us an idea of the overall price range.
Doji candles are another type of candle that you can see on your charts. These candles have little to no body formed. Although a price may have moved significantly during a given period, the candle will not have a body if it closed back at the same price as it started or somewhere near it. This means that both bearish and bullish traders are trying to fight for dominance in the market, essentially stalling out price movement.
The above is some of the necessary information required for reading a chart. All of the information presented on charts are based on price action. Bullish candles signify the market pushing higher as price increases. If you spot bearish candles, this is interpreted as price decreasing or the market falling. There are wicks visible on both ends of the market candlesticks, representing the highest and lowest prices.
Market candlesticks serve as excellent indicators of traders’ emotions. Smart traders rely on candlesticks to make trading decisions since they can help forecast the short-term direction of price actions. With ample practice, you’ll be able to read patterns in trading charts in no time.