In the world of trading cryptocurrency, reading and understanding a candlestick chart is probably the cornerstone knowledge of what every other trading technique is built on. At first glance, a candlestick chart can look like a daunting thing but, when you break it down, there isn’t that much to it. Once you have grasped the fundamentals, you’ll be able to recognise patterns and trends such as a higher-low, lower-high structure, divergence, bull and bear flags and countless other trading methods which are used by seasoned traders in all different markets.
A single candle represents a period of time. If you are looking at the daily chart, each candle represents 24 hours (or a day). If you are looking at the hourly chart, each candle represents an hour. Shorter timeframes can often show more signals than longer timeframes but with less accuracy. The more you “zoom out” (i.e. look at the daily rather than the hourly), the more accurate the signals should be.
The Anatomy of the Candlestick
For this example, we are going to assume the chart in the infographic is on the daily view. The concept is the same, regardless of the timeframe we have chosen. Each candle consists of two main parts; the candle body and the wick. Between those elements, we can clearly see the open price, the close price and the high and low of the 24 hour period relating to that candle. Obviously, if we were looking at the hourly view, we would see the open, close, high and low of the hour relating to that candle instead of the day.
If the candle is green, the price of the chosen asset increased between the open and the close. If the candle is red, the asset’s value decreased during that day. Different charting applications use different colours and some can even be set by the user so take note that the colours on the charts may vary. The candle body signifies the price difference between the market open and the market close. The taller the candle, the bigger the move during that day. On a green candle, the bottom of the candle body is the open and the top of the candle body is the close. On a red candle, the top of the candle body is the open and the bottom is the close.
The wicks show any movement beyond that of the candle body within the day corresponding to the candle. These are known as “highs” and “lows”. So if Bitcoin opens at €35,500 and closes at €37,200 but surges to €40,500 within that day, there will be a large wick above the candle body between the close (€32,200) and the high (€40,500). Similarly, if there is a large drop in the asset’s price beyond the market close, that will be signified by a wick below the candle. Wicks are an important part of the anatomy of a candle as they allow us to see certain patterns such as “Higher-lows” and “Lower-highs”.
How to use Candlestick charts
So, in summary, each candle represents the increase or decrease of an asset’s value within a set timeframe. The bodies show the move between the open and close of the candle whereas the wicks show the highs and lows. The taller the bodies, the larger the move within that timeframe. The longer the wicks, the further away the high was from the close of that day (if we are looking at the daily chart).
Sometimes, the charts may appear completely random but often, we start to notice patterns which traders can use to analyse and predict future, short-term movements in the markets. This can help minimise losses when trading which, in turn, makes us better traders.