How to read candlestick charts for day trading?

Candlesticks. One of the powerful, yet fundamental tool for technical analysis of financial instruments.

I can’t think of a trading software or platform out there that does not provide charts with candlesticks. In fact, it’s the default chart view in most platforms.

The candlestick charts are especially useful in intraday trading where punching orders happen in seconds if not minutes. So it’s very important to have up to date price action information in front of us to make an accurate and informed trading decision.

In this post, let’s understand what candlesticks are and how we can use them for day trading.

What are candlesticks?

Simply put, a candlestick pictorially represents price action within a specific interval.

For example, on a 5 minute chart, each candle represents price action for 5 minutes each. If the price was 100 at 10:05 AM, it moved as high as 11, went as low as 92 and finally ended at 103 at 10:10 AM, all this information can be seen in a single candlestick.

So a candlestick provides information about the following for that particular session/interval:

Below is how a typical candle stick would look like.

A candlestick has a body, top wick and a bottom wick. The sizes of the body and the wicks change with respect to price.

See some examples below of some frequently appearing candlesticks on the charts.

As you can see, in a candle session, if buyers were dominating we see a full green body and if sellers were dominating we see a full red body.

In the bullish hammer candle, we can see that, the sellers tried to push the price lower but failed, and the buyers took control to close the candle in green with a deep bottom wick. And vice versa for the bearing hammer candle.

The sizes and shapes keep varying because price keeps changing in the market. Each candlestick provides some key information about that session.

How to read and trade using candlestick charts?

Let’s look at a real candlestick chart of a stock called AXISBANK from the Nifty 50 list. This is the 5 minute chart which means each candle stick represents price action for 5 minutes.

As you can see, there are lots of candles spread across days. Each NSE trading session starts at 9:15 AM and ends at 3:15 PM. That’s 6 hours. That’s like 72 candles in a day.

Do we need to study each and every candle? The answer is no. But it helps to read the overall price action.

Now let’s add some context to this chart.

Now let’s see what we have here. The same chart with some added context of highs and lows. These marked areas are where the price stopped and reversed direction.

If you read from left to right, you’d say that the price has been making new higher highs and higher lows. And price is going higher and higher overall.

Which means we are in an up trend. What do we do in an uptrend? We wait for the next low and take a long entry and keep trailing stop loss with new higher lows.

Interesting right? We are able to take trades and we haven’t even looked closed at the candles.

Now let’s dig a bit deeper.

Let’s use the same chart. But this time, let’s identify some key candles.

Now observe the marked candles. These are bullish candles. They clearly indicate that there is good amount of buying pressure at these levels.

These candles give us great entry points for entering into long positions.

You should also compare these levels with the previous picture with highs and lows. You’d notice that these candles appear at new lows.

There is an important lesson here. While, technically, bullish candles can appear anywhere in the chart, if they appear at key lows, they provide more context to chart reading.

They clearly indicate that selling is subsiding and buying will now ensue.

So by knowing this information, we can exit short positions if we were in it, and prepare to enter into long trades.

Now do you see why candlesticks are important? They provide the required confirmation at key levels and can act as entry signals.

This works on all timeframes and on all financial markets.

Now finally, just to show you how to trade a chart like that, I’m marking the entry and exit signals.

Conclusion

Well the subject of candlesticks is actually big and there are many chart patterns to be learnt.

But I hope this blog post helped you to get the basic idea of candlesticks and how to use them in trading.

Do check out my other blog post about How to learn to trade stocks? where I recommended some books for learning.

If you have any questions, comment below and I will try my best to answer them.

Thanks for reading. Subscribe to this blog for more quality blog posts.

Cheers,

-uday

Trade at your own risk. My writings are for educational purposes only.

Uday Kiran Kavaturu

Originally published at https://udaykavaturu.com on May 28, 2021.