Tuesday, October 18, 2011

Back to basics: How to read a candlestick chart

Reading a candlestick chart can seem hard at first for a beginner, but once you know what each candle represents it becomes much easier.

A candle has 3 basic parts to it that represent 5 things. The 3 basic parts (top to bottom) are the Upper Shadow, Body, and Lower Shadow.

The body of the candle represents 3 things. The open price, the close price, and wither the candle closed up or down as compared to the open. In a green body the closing price is higher than the open price, and in a red body the closing price is lower than the open price.

The upper and lower shadows are commonly referred to as "wicks." The upper shadow (or upper wick) represents the high, and the lower shadow (or lower wick) represents the low.

The entire candle represents a moment in time. So if you were on a daily chart each candle would represent 1 day, or if you were on a 1 minute chart each candle would represent 1 minute. Most people trade with daily, 1 hour, 15 minute, 10 minute, 5 minute, and 1 minute bars. However there are more time frames to choose from, and to choose one all depends on your style of trading. A swing trader might use a daily or hourly time frame, and a day trader might use a 10, 5, or 1 minute bar (or even bars that represent 5 seconds). Again, it all depends on the individual's style of trading so experiment with different time frames to see what is best for you and your style.

Remember that candlestick charts can apply to any type of trading (stocks, futures, forex, options, etc.), because all they represent is price movement.

I hope this helps you to better read your candlestick charts, and wish you luck in your trading!

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