We have all seen them, maybe you understand what they mean, if so, feel free to skip this quick lesson.
The reason I am starting with this topic for this series is because being able to understand what candlesticks mean and how they relate to price action (price moving up and down), are the ground fundamentals to being able to understand what you are seeing unfold during live trading. Once we establish a solid base in reading candlestick charts, you can start to see patterns, and draw support lines and resistance, and maybe even show someone else what they mean.
Think of it like training an AI bot, you have to constantly feed that machine similar images over time to train its "eye" to spot things that look similar to something that occurred in the past. The more practice and screen time you get, the better you will get at spotting these types of things, so you can quickly make a decision about whats best for your position based on what you are seeing develop. The thing about trading is you want to try and be ahead of the masses to be able to take full advantage of an opportunity. The sooner you can recognize these patterns forming before everyone else, the better chance you have at making money.
Candle stick charts actually originated in Japan in the 1700s, and are meant to show the relationship linkage between supply and demand, and the actual emotion of traders. That emotion is shown with different colors and size of the various types of candle sticks that make up an individual chart. Every single candle stick tells a story about whatever time frame you are analyzing. If you are looking at a daily chart, each candle represents one day of price action. If you are looking at a 5 min chart, each candle represent how price moves over the course of the current 5 minute period, and so on for each different time interval you are focusing on.
As mentioned previously, a candle represent price moving up and down during any given period of time. (Daily, 4 hour, 5 min, and even seconds). As show below, the lines above and below each candle's body are called the wick (or shadow). It represents the price highs or lows that were seen during the candle's timeframe. These are important to a trader because they show the highs, lows, open, and close for each candle.
This is a candle stick chart showing how each bearish or bullish candles are formed.
For a red candle, or a bearish (🐻) candle, price opens at the top Open(a) and closes at the bottom Close (a) , which turns the color red for the candle (color can be customized depending on what trading platform you are using). For a green candle, or a bullish (🐂 ) candle, price opens at the bottom Open (b) and closes at the top Close (b) . Whichever direction the price moves during that time frame determines what the candle closes at, bearish or bullish. Each one of these candles is a visual representation for the supply and demand factors, and an indication of the emotions that traders are experiencing.
Various timeframes are only important to the person using them; meaning, not everyone will use the same timeframe to make a decision about when to enter or exit a position. Someone more laid back, or holding a position longer than a day, may only care about the weekly chart or daily chart. Or maybe someone is really confident in their position and only cares about the monthly chart (mostly used for futures trading). The further and further you zoom in, say the hourly, or 5 min chart. The noisier and louder the action gets, and makes it harder to make decisions and actually see whats going on.
Your use of the various timeframes available depend entirely on how quick you tend to exit your position, or the timeframe you plan on holding your position. When I am in a position I am constantly changing timeframes to help myself grasp what is happening at every level. It helps me understand the whole picture and tune out the noise that sometimes can bounce you out of a position, or mess with your emotions.
For example, if you are in a position and are constantly only watching the 1 min chart, like shown below, you might as well have 911 on speed dial, because you will have multiple strokes over the course of 5 mins. I like to think of a 1 min chart as an actual representation of your heart beat as you watch this. Some people actually trade off of the 1 min chart, they are what are commonly referred to as psychopaths.
