Candlestick Reading Tips for Stocks and Forex Charts - From Basic to Advanced

Want to step into the world of stock or forex trading? The first skill you must master is reading stock charts. This is not only a fundamental skill but also the key to analyzing price trends, predicting market fluctuations, and making accurate buy and sell decisions. So, how can you learn to read price charts most effectively? The following article will guide you step by step.

Master the 3 Basic Types of Stock - Forex Charts

To get started, you need to understand the three widely used chart types in technical analysis.

Line Chart (Line Chart) is the simplest form, providing only closing prices for each time frame. Its advantage is ease of understanding and suitability for comparing long-term performance of multiple stocks. However, it does not reflect short-term price fluctuations, so it’s not ideal for short-term traders.

Bar Chart (Bar Chart) offers more information, including open, close, high, and low prices for each trading session. The OHLC (Open-High-Low-Close) format is preferred because it provides all this data. The length of the bar indicates the degree of volatility, helping you quickly identify trends and price patterns.

Candlestick Chart (Candlestick Chart) is the most popular choice among traders because it combines both seller and buyer psychology. It provides complete information about open, close, high, and low prices while helping you recognize reversal candlestick patterns. When learning how to read stock candles, you’ll find that candlestick charts offer both an overview and detailed insights, suitable for both long-term and short-term analysis.

Essential Components on a Price Chart

When opening a stock chart on platforms like TradingView, you’ll see various components:

• Stock information: name, current price, percentage change during the session
• X and Y axes: representing time and price levels respectively
• Time frame: selectable from seconds, minutes, hours, days, weeks, months
• Technical indicators: additional analysis tools like MACD, Bollinger Bands, Moving Averages
• Drawing tools: for drawing resistance, support, trend lines
• Fundamental events: info on stock splits, earnings reports, dividends

Three Important Factors When Reading Stock Candles

1. Identify Price Trends

The first step in reading stock candles is to get an overview of the overall price trend. You should check the trend across three time frames: long-term, medium-term, and short-term to make informed decisions.

For example, if AAPL stock is trending upward on the weekly chart but shows multiple waves up and down on the daily chart, you might seize the opportunity to buy at lower prices during the day rather than waiting.

2. Recognize Resistance and Support Levels

Support levels are price zones where the price tends to bounce back up, while resistance levels are zones that hinder upward movement. The easiest way to identify them is to find price levels where the price repeatedly reverses direction.

Taking Bitcoin as an example, if BTC repeatedly gets pushed down when touching a red line, that’s resistance. If the price bounces up when touching a green line, that’s support. Each time the price hits these levels, their effectiveness diminishes, increasing the chance of a breakout.

3. Analyze Trading Volume

Volume is a crucial supply and demand indicator. If the price rises along with increasing volume, it’s a strong signal. But if the price increases while volume decreases, it could be a warning of a lack of support from investors.

Combining volume analysis with trend assessment will help you confirm your trading decisions more reliably.

Technical Indicators Supporting Analysis

Bollinger Bands - Defining Price Boundaries

Bollinger Bands consist of a middle moving average line and two outer bands. The upper band acts as resistance, and the lower band as support. A simple strategy is to buy when the price touches the lower band and sell when it touches the upper band, though win rates are not always high.

Moving Average (Moving Average) - Detecting Trends

The 50-day and 200-day moving averages are popular indicators. When the 50-day MA crosses above the 200-day MA, it signals a potential trend reversal to the upside. Conversely, when the 50-day MA crosses below the 200-day MA, it indicates a possible downward trend.

RSI - Detecting Overbought and Oversold Conditions

The RSI indicator ranges from 0-100 with three key levels: 30, 50, 70. An RSI above 70 indicates overbought conditions, suggesting a high probability of price decline. An RSI below 30 indicates oversold conditions, with potential for price rebound. Crossing above or below 50 also helps clarify the current trend.

MACD - Identifying Price Momentum

MACD combines moving averages with a histogram. A simple buy signal occurs when the histogram shifts from red to green; a sell signal when it shifts from green to red.

Stochastic - Measuring Price Volatility

Similar to RSI, Stochastic identifies overbought at 80 and oversold at 20. A straightforward strategy is to buy in oversold zones and sell in overbought zones.

Impact of Fundamental Events on Stock Prices

Events such as stock splits, earnings announcements, or dividend payments have significant effects. For example, Tesla’s stock split in August caused a sharp increase during the session, but then declined as shareholders took profits. Short-term traders should pay attention to these events to time their market entries appropriately.

Conclusion

Reading stock candles is an essential basic skill for any investor. The three fundamental factors are price trend, support/resistance levels, and trading volume. By combining technical indicators like MA, RSI, MACD, and Stochastic, you will gain multiple perspectives to make more accurate trading decisions.

However, no indicator is 100% accurate all the time. Therefore, before applying any strategy to a live account, test your success rate with a demo account. Regular practice will help you become a proficient chart analyst.