A candlestick, a line or a bar: these shapes form the basis for some of the most used charts in finance. In this article, we will help you master candlestick charts.
Charts in Trading: Useful Trackers
Knowing how to read charts is a key skill for any trader. Charts are a way to visually interpret market data, market price dynamics , and they can be a reference point to shape further investment decisions. There are several types of charts, but here we will discuss the two most commonly used types: line charts and candlesticks
Line charts may be the easiest to read, but they only feature one piece of information: the closing price of the underlying asset over time (days, hours, minutes…).
Bar charts build on this to add data about the opening and closing prices. Bar charts are made of vertical lines (bars), with short horizontal lines protruding from each side. The line on the left marks the opening price, while the one on the right depicts the closing price.
Candlestick charts track even more information on a single “candle” thanks to the addition of colors (green/red) and a wick (sometimes referred to as “shadow”). This helps them display closing/opening prices and high/low points. Candlestick charts are the most frequently used chart in trading. Fun fact: they were invented in Japan in the 1700s.
Candlestick charts may feel daunting to read and analyze, at first. But once you understand how they are designed, you’ll see they are not that complex.
Understanding a Candlestick Chart
Each candle corresponds to a specific time period, ranging from seconds to weeks, or even months. This depends on the trader’s interest in visualizing the evolution of a price in the very short term (particularly for high frequency trading) or in a more macro time frame. Most online trading chart tools allow traders to switch between time frames at the top left hand corner of the chart (1M, 1W, 1H, 1D, 1Y, and many more).
Now that we know that a candle represents a time interval, let’s get to the two types of information it displays.
- Firstly, there’s the candle itself, depicting opening & closing prices.
Those are the prices at the beginning and end of the time frame – they shape the body of the candle.
💡 A green candle displays an opening price at its bottom and a higher closing price at its top, showing an increase in value (opening price < closing price). You guessed it right: this direction is reversed in a red candle, as it shows a drop in price (opening price > closing price).
- Secondly, the candle’s wick corresponds to the highest & lowest price levels.
Those levels are the maximum price variations achieved during the time period associated with the candle: the lowest level is logically represented by the bottom wick, while the highest wick stands for the top one.
💡The bigger the wicks, the bigger the price variations below and/or above the opening & closing prices within the time interval of the candle.
To better understand how a candle builds up, a sketch is worth a thousand words.
This type of chart is therefore useful to quickly identify bullish/bearish patterns and support levels, at any scale. Even so, candlestick charts are not to be used in isolation but along other indicators such as moving average or transaction volume before making investment decisions.
Candlestick Charts in Action
Source: Tradingview. Bullish pattern: BTC Dec 2020 – Jan 2021 / Bearish pattern: BTC May 2021.
The charts above document bullish/bearish periods for BTC. In the first chart, green is the dominant color as prices are rising (closing price is higher than opening price). The second chart is mostly red as prices are falling. An increase in candle size means there are more intense price variations between the opening and closing prices.
Those charts display a variety of candlesticks within them. Here are, in a schematic version, some of the main types of candles to memorize to quickly interpret a candlestick chart.
Line Chart: Easier to Use
Hal does not use candlestick charts. We have opted instead for the seemingly modest line chart. Why? Since it features less information, only plotting the closing price over time, it’s easier to read for newcomers.
On HAL, each strategy comes with a line chart, where each point is the end-of-day performance of the strategy versus its underlying asset. This makes it easy to read the absolute performance, by comparing the buy and sell points distance.
You can also check out the combined strategy/underlying asset chart, which compares the strategy to its underlying asset. This is helpful to read the relative performance of a strategy and see if it outperformed or underperformed its underlying asset.
Reading graphs is a great way to check historical data or track strategy performance at a glance. HAL provides you with several ways to do this, optimized for quick analysis. And because educating crypto traders is part of our mission, you now know to read all candlestick charts you might come across in your broader market research!
Investing involves risk, including the possible loss of all the money you invest. In particular, crypto-assets are a highly volatile and speculative asset class. HAL is only suitable for traders who are willing to bear the risk of loss and experience sharp drawdowns. Past performance is not necessarily a guide to future performance. The performances presented are real performances calculated net of execution fees and slippage from a proprietary Binance account.
The purpose of this material is to provide objective, educational and interesting commentary and analysis on developments in the crypto-assets sector. Nothing in this material should be interpreted as constituting an offer of (or any solicitation in connection with) any investment products or services by any member of the CoinShares Group where it may be illegal to do so. Access to any investment products or services of the CoinShares Group is in all cases subject to the applicable laws and regulations relating thereto.