Candlestick Chart Complete Guide: From Basics to Advanced Analysis Techniques

What is a Candlestick?

Candlestick (K-line) is a chart that represents the price trends over a certain period through four key prices (opening price, closing price, high price, low price). It visually condenses market movements and supports traders' analysis by conveying price information and market sentiment using different colors and shapes.

When looking at a candlestick chart, the rectangular part is called the "body" and this body is displayed as either filled or hollow, shown in red or green. This is determined by the relationship between the closing price and the opening price for that period:

• When the closing price is higher than the opening price, the body is red and is called a "Bullish Candlestick".
• Conversely, if the closing price is lower than the opening price, the body is green and is called a "bearish candlestick."

However, this is the definition of colors in the Japanese stock market, and in the US stock market, it is reversed, with bullish candles being green and bearish candles being red. Many cryptocurrency trading platforms adopt a similar display method.

The "lines" other than the body are called "wicks (shadows):"

• The shadow line above the body is called the "upper wick" and the highest point represents the highest price during that period.
• The shadow line below the body is called the "lower wick," and the lowest point represents the lowest price during that period.

Candlestick by Timeframe

Candlestick can be applied to various time frames:

• Daily candlestick chart within 1 day
• 1 Week Weekly Candlestick Chart
• 1 Month Candlestick Chart
• 1 Year Candlestick Chart

When applying different time frames, candlestick patterns generally show different shapes.

Daily Chart is suitable for grasping the price trends of stocks or cryptocurrencies over the same day or several days, and it helps short-term traders in their decision-making.

For long-term value investors, daily charts may not be sufficient. In this case, weekly, monthly, and even yearly charts can be used to observe price fluctuations over several weeks or months. When observing monthly charts, it is also possible to incorporate fundamental information into the analysis.

How to Read Candlesticks

Prices are always fluctuating, and the patterns of candlesticks change according to these four price variations, ultimately reflecting the market's trends and sentiments. Below, we will explain the characteristics and meanings of different candlestick patterns.

The meaning of candlestick patterns

Red Candlestick without Upper and Lower Shadows

• Features: Close Price = Highest Price
• Meaning: Indicates that the price has continuously risen over a certain period without encountering resistance. There is strong buying pressure, and the price may rise further.

Red Candlestick with Upper and Lower Shadows

• Upper and lower shadows of the same length: The market movement is balanced, and market sentiment is in equilibrium. The strength of both bulls and bears is equal, and there is no clear direction in the price.
• Lower shadow > Upper shadow: The market shows a tendency to rebound, but the buyers' strength is insufficient, making it difficult to break through resistance.
• Upper Shadow > Lower Shadow: The market is in an upward trend, and buyers are in a favorable position.

Red Candlestick with Upper Shadow Only

• Feature: Close > Open
• Meaning: The buying momentum was strong, and the price rose during a certain period, but it encountered selling pressure at the peak, causing the price to drop slightly. Nevertheless, there is a possibility that the price may continue to rise.

Red candlestick with only a lower shadow

• Features: Closing price > Opening price
• Meaning: The buyers' momentum is strong, and although the price temporarily declined, it was supported at the lowest point and rebounded. There is a possibility that the price may turn into an upward trend.

Green Candlestick without Upper and Lower Shadows

• Features: Close Price = Lowest Price
• Meaning: Indicates that the price has been continuously declining over a certain period without encountering resistance or support. The selling pressure is very strong, and there is a possibility that the price may decline further.

Green candlestick with upper and lower shadows

• Upper and lower wicks of the same length: the market is in a downtrend, and there is a balance between long and short positions, but buyers cannot gain the upper hand, and sellers are in control of the market. The price may continue to decline.
• Lower shadow > upper shadow: The market is on a recovery trend, but selling pressure is strong, and it may decline again.
• Upper wick > Lower wick: The market is in a downtrend, with both buyers and sellers at an impasse, and prices are fluctuating within a certain range.

Candlestick Chart Analysis Method

Analysis Rule 1: Focus on understanding rather than memorizing patterns.

Candlestick is actually easy to understand. Essentially, it is composed of the opening price, closing price, high price, and low price, forming various shapes that reflect different market trends. It is sufficient to analyze it logically, and there is no need to simply memorize the patterns.

Analysis Rule 2: Pay attention to the position of the closing price

What position is the closing price of the candlestick in?

• Underlying meaning: "The essence of this question is to help traders understand which force currently controls the market."

How does the length of the body compare to other Candlesticks?

• Implication: "It helps traders understand whether the strength of buyers or sellers is leading to a change in market trends." A specific method is to compare the length of the current candlestick's body with that of previous candlesticks. If the current candlestick is significantly larger (more than twice), it indicates strong buying or selling pressure.

Analysis Rule 3: Identify key wave points and discern market trends.

The easiest way to read a candlestick chart is to identify the key wave points on the chart and observe whether the wave points are moving upwards, downwards, or horizontally.

• If the highs and lows of the waves are rising, it is an upward trend.
• When the highs and lows of the wave are declining, it indicates a downward trend.
• When the highs and lows of the waves are at similar levels, they are generally fluctuating within a certain range.

Analysis Rule 4: Predicting Market Turning Points

Predicting market turning points is key to finding low-risk, high-return trading opportunities. To accurately predict market reversals, I will explain the following trading techniques:

Step 1: Wait for the price to reach important levels such as support lines and resistance lines. Check for any downward breakout or upward breakout.

Step 2: Wait for the candlestick body to become smaller and for the trend movement to weaken. Combine with volume, KD lines, etc. for judgment.

Step 3: Wait for the retracement movement to strengthen and execute the trading strategy.

Candlestick Chart Analysis Techniques

Trading with chart patterns like a professional trader is not difficult. You need to master the following three points.

#1: The gradual rise of the wave's low indicates that either buyers or sellers have strong power as the price approaches the resistance line.

Conventional traders worry that the price may have reached a high when it rises and approaches the resistance line, considering a short position.

It is important to note that the meaning of the price approaching the resistance line is varied, and particularly when the lows of the waves gradually rise towards the resistance line, this indicates that the buyers are strong and are gradually pushing the price up, while the sellers are weak and unable to bring the price down. Typically, in this situation, there is also a possibility that the price will continue to rise.

Such patterns can form an ascending triangle on the chart.

#2: When momentum becomes overbought or oversold, trends often reverse.

As momentum significantly decreases, buyers are unable to push the price up further, and as the price gradually falls, the number of buyers being attracted also decreases. The gap formed at this stage is called a "liquidity gap." This means that the expectations for the price at that point are low, making it easier for the market to reverse.

#3: Identifying Fake Breakouts

One phenomenon that many investors struggle with is when they enter the market after it breaks through a high and a large candlestick appears, only for the market to reverse shortly after their entry, forcing them to eventually close their trades. This situation can be referred to as a "false breakout," and entering a buy position at this timing can lead to a difficult situation. This is because the market moves in the opposite direction immediately.

So, how can we make a profit? Traders first look for breakouts of support and resistance lines, and after the price declines and the breakout fails, they can make trades that align in the opposite direction of the false breakout.

Main Points

• The basic elements of candlestick charts and the meanings corresponding to each pattern/type are very important and form the foundation of all patterns.

• To understand Candlestick, it is sufficient to grasp the price range of the closing price and the length of the Candlestick's body. There is no need to memorize it; you can naturally acquire it by looking at many.

• Understanding the trend of the wave points helps in analyzing the overall market trend.

• When the trend movement slows down or the retracement movement gradually strengthens, it indicates that the strength of the sellers or buyers is weakening.