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How To Read Candlestick Charts

Introduction

Traders use various tools in order to ensure that they are picking the right financial instruments to invest in. Some of these tools include market newsletters, economic calendars, as well as price charts.

Such charts can prove to be extremely helpful for traders who want to keep track of intricate price movements and time the market accordingly. The primary purpose behind creating price charts is to plot the prices of an asset over a specific period. These charts can also be called time series plots.

All price charts include two major data points. The first point is the actual price of the asset. This is typically represented on the Y-axis. The second point covered in price charts is the time frame, which is represented on the X-axis. Investors can look at the chart from left to right and track the performance of the asset over time.

Price charts can also provide other useful indicators such as high points and low points. Investors can make use of all this information in order to make an informed investment decision.

Using Charts To Analyze The Market

Price charts can help analysts predict the future price movement of an asset. Such charts can be used by both fundamental analysts as well as technical analysts. These charts can include price information spanning a day, a month, a quarter, or even a year.

Fundamental analysts tend to look at simple price charts that highlight the movement of an asset over a specific period. After that, they can use these charts to map out the potential pathway in which the asset is likely to move in the future.
On the other hand, technical analysts study more specific charts. These analysts focus on reviewing data from graphs such as candlestick charts.

Candlestick charts provide them with in-depth information such as the price movement, the high point, the low point, as well as mapped out trends.
Technical analysts try to use these information sets to identify price trends and time their investments.

Different Types Of Charts

There are numerous charts which can be used to display price information. Some of these are as follows:

Bar Charts

Bar charts are probably the most commonly used charts when it comes to financial analysis. These charts are fairly simple in terms of their layout. They indicate the highs and lows achieved by an asset during a specified time frame. 

The opening price of an asset is typically highlighted on the left side of the chart, while the right side shows the closing price. The price axis is typically included on the far-right side of the chart so that an analyst can review the price movement. Similarly, the time period is usually shown at the bottom of the chart.

Image 1: Bar Chart

Line Charts
Line charts are also fairly popular around the world. These charts are quite similar to bar charts, with the only major difference being that the asset price is shown in the form of a line instead of a bar. Analysts can look at line charts and assess whether an asset is moving upwards or downwards. Image 2 above shows a simple line chart that highlights the price movement of an asset over a three-day period.


Candlestick Charts

Candlestick charts are more popular among technical analysts. These charts tend to display a lot more information compared to a simple line chart. Reading these charts requires you to understand several aspects, such as candles and trend formations. Candlestick charts can be used to track a wide range of assets such as stocks, forex, indices, and commodities.

These charts originated in Japan during the 18th century and have become quite popular around the world since then. In order to create a candlestick chart, you require various data points such as the opening price, the closing price, the low point, and the high point of an asset’s price.

These charts include two major types of candlesticks, bullish and bearish. Bullish candlesticks are typically represented using green color, while bearish ones are shown in red. As the name suggests, bullish candlesticks indicate that the closing price of the asset is higher than its opening price, while the bearish candlesticks show vice versa.

Further, the topmost and bottom most points of a candle highlight the opening and closing prices. On the other hand, the wicks of the candles show the maximum and minimum prices. Image 3 below shows a typical candlestick chart for the EUR/USD forex pair:

Image 3: Candlestick Chart

Source: Forex Training Group

Spotting Trends With Charts

Thus, it is evident that there are various types of charts that can be used to track the prices of assets. Traders must choose the right charts and spot major price trends. It is advisable to start looking at all charts from right to left and then review the movement in the price.
If you notice any particular trends in terms of the movement, then you may be able to take advantage of it and maximize your earnings.

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