Reading a candlestick chart

A chart is a trader's most common tool. It does not tell the future – it shows what happened and how people behaved. If you can read it, at least you know where you are.

A candle in a nutshell#

Each candle sums up one period with four prices: open, high, low and close.

Timeframe#

The same market looks completely different depending on how long a period one candle covers. On a one-minute chart it is a wild rollercoaster, on a weekly chart a calm road. This is called the timeframe.

• Short timeframes (minutes, hours) – lots of noise, quick decisions, easy to get caught out.
• Long timeframes (days, weeks) – less noise, a clearer big picture.

Beginners do well to start with the daily chart and also look at the weekly one, to know where they are in the bigger picture.

Trend#

A trend is the direction the price moves in over a longer time:

• uptrend – every high and every low is above the previous one,
• downtrend – every high and low is lower,
• sideways – the price stays in a range between support and resistance.

Look at Bitcoin in the first half of 2024:

From late January the price made higher highs and higher lows. In mid-March the trend stopped at resistance around 73,000, and for months afterwards the price moved within a range.

Candlestick patterns#

Some candle shapes can hint at a turn – for example the bullish engulfing pattern:

But patterns guarantee nothing on their own. At best they work as a warning that "something is going on here", never as a sure signal to buy.

Common myths#

• "I'll see more on a one-minute chart." You will mostly see more noise.
• "A hammer = the price will rise." Maybe. Or not. That is what risk management is for.
• "A trend lasts forever." Every trend ends – the only question is when.