Deepen your understanding of candlestick charts: learn how to read candlesticks from scratch and master the core of technical analysis

Do you think understanding candlestick charts is just about looking at colors and patterns? You might not have truly grasped the market logic behind candlesticks. How to read candlestick charts? It’s not just about recognizing patterns; more importantly, understanding what each candlestick represents in terms of market sentiment. This article will guide you from basic concepts to practical applications, providing a comprehensive analysis of the secrets behind candlestick charts.

Understanding Candlesticks: Four Prices Condense a Market Story

Candlesticks, also called candlestick charts or K-bars, are the most fundamental and important tools in technical analysis. A candlestick chart summarizes the price movement within a specific period using four key prices (Open, Close, High, Low), represented with different colors and shapes to convey price information and market sentiment.

Components of a Candlestick

When analyzing candlestick charts, you need to understand two main parts:

Candlestick Body: The rectangular main part reflects the difference between the opening and closing prices. The color depends on the relationship between close and open:

• Close > Open → Red body (Bullish candle), indicating an upward move
• Close < Open → Green body (Bearish candle), indicating a downward move

Shadows (Wicks): The lines outside the body are called shadows, divided into upper and lower parts:

• Upper shadow: The highest point indicates the highest price during the period
• Lower shadow: The lowest point indicates the lowest price during the period

Note: Different trading platforms may define colors differently; some use green for bullish and red for bearish, which is common in the US. The key is to understand what the colors represent in market sentiment, not just memorize their meanings.

Candlestick Timeframes: Choosing the Right Cycle to See the Trend

How to read candlesticks? First, select the appropriate timeframe. Candlesticks can be applied across different time ranges:

• Daily (Day K): Shows intraday price movements, suitable for short-term traders to judge daily volatility
• Weekly (Week K): Displays the overall trend within a week, helping medium-term traders grasp weekly direction
• Monthly (Month K): Presents large swings within a month, used by long-term investors to observe multi-month fluctuations
• Yearly (Year K): Shows long-term annual trends

Candlestick patterns differ across timeframes. Short-term traders are easily confused by noise in daily charts, while long-term investors need to look at weekly or monthly charts to identify true trend directions. Many beginners confuse timeframes, trading frequently during short-term fluctuations and missing the bigger trend.

Interpreting Candlestick Patterns: Market Power Dynamics Through Shapes

Candlestick patterns fundamentally reflect the balance of power between bulls and bears. Instead of memorizing pattern names, it’s better to understand the logic behind them.

Bullish Candlestick with No Shadows: Close equals the high, indicating strong buying pressure, continuous price rise during the period, no resistance encountered, and potential for further upward movement.

Bullish Candlestick with Long Lower Shadow: Although it closes higher, the long lower shadow shows the price was pushed down but recovered by buyers. This indicates that while buyers ultimately gained control, sellers still have strength, signaling a slight bullish advantage.

Bullish Candlestick with Long Upper Shadow: Closes higher, but the upper shadow shows prices were pushed up but then pulled back, indicating resistance to further gains and weakening momentum.

Bearish Candlestick with No Shadows: Close equals the low, showing strong selling pressure, continuous decline during the period, and possible further downside.

Bearish Candlestick with Long Lower Shadow: Although it closes lower, the long lower shadow indicates buyers attempted to push prices up but were overwhelmed by sellers. This pattern often appears at early reversal points.

The key point: Don’t just look at the shape; pay attention to what the pattern reveals about market forces.

How to Read Candlesticks: Three Core Rules

Rule 1: Use Closing Position to Judge Market Control

Where the candlestick closes determines who currently controls the market.

If the close is in the upper half of the body, it indicates increasing bullish strength; if in the lower half, it suggests bearish control. Especially when closing near the high of the day, market confidence is high; near the low indicates dominance by sellers.

This is not just a numerical game but a way to judge who holds the market.

Rule 2: Compare Body Lengths to Assess Strength

The same upward move can be characterized by the body size: a large body (more than twice the size of previous ones) indicates strong buying; small bodies suggest weakening buying power.

Compare the current candlestick’s body length with previous ones. If recent bodies are shrinking regardless of direction, it signals waning momentum and a higher chance of reversal.

Many investors jump into trades at rising prices without noticing that the bodies are shrinking—that’s often the start of losses.

Rule 3: Identify Swing Highs and Lows to Determine Overall Trend

The simplest way to interpret candlestick charts is to observe what the swing highs and lows are doing:

• Both highs and lows rising = Uptrend, buyers in control
• Both highs and lows falling = Downtrend, sellers in control
• Highs and lows roughly equal = Sideways consolidation, balanced forces

Many beginners trade frequently during consolidations, getting caught in whipsaws. The correct approach is to wait for breakouts of swing highs or lows to confirm the true trend.

Practical Application of Candlesticks: Catch Reversal Opportunities

Understanding theory is not enough; you must know how to apply it. Predicting market reversals is key to finding low-risk, high-reward opportunities.

Step 1: Wait for signals at key levels

When prices reach support or resistance, don’t rush into trades. Watch whether there is a genuine breakout or just a false move.

Step 2: Observe candlestick body changes and volume

When the trend weakens, candlestick bodies become smaller. Combining this with volume and other indicators (like KD lines) helps more accurately judge if a reversal is happening.

Step 3: Wait for retracements and confirmation

Don’t enter full positions on the first signal. Wait for a retracement and look for a second confirmation, greatly reducing false breakouts.

Common Trap: Fake Breakouts

Many investors are troubled by “fake breakouts”: prices break above resistance with a large bullish candle, seeming perfect, but soon reverse and cause losses.

The solution is simple: wait for the price to pull back, confirm the failure of the breakout, then trade in the opposite direction of the false move. For example, if an upward breakout fails, look for a short opportunity on a downward breakout.

Three Advanced Techniques for Candlestick Analysis

Technique 1: Continuous Rising of Swing Lows Near Resistance

Traditional traders see prices approaching resistance and want to short, but smart traders observe what swing lows are doing.

If swing lows are rising while prices approach resistance, it’s not a reversal signal but a sign of strong buyers pushing higher. Wait for a breakout of resistance rather than rushing to short. This pattern often forms an ascending triangle, indicating increasing buying strength.

Technique 2: Momentum Overbought/Oversold Often Leads to Reversal

When momentum drops sharply, it indicates buyers are exhausted, and prices start to decline. As prices fall, fewer buyers are attracted, creating a “liquidity gap.”

This suggests market consensus is lacking, and the probability of reversal increases significantly. Don’t wait until everyone is bearish; smart traders prepare at the first signs of waning momentum.

Technique 3: Distinguish True Breakouts from Fake Breakouts

A genuine breakout should be accompanied by increased strength (large body, high volume), while fake breakouts often retrace after one or two candles.

Judge whether the breakout candle’s body is enlarging or shrinking. An enlarging body indicates a real breakout; shrinking suggests a false move. Also, check if the price has stabilized above the previous resistance—only then is the breakout confirmed.

Summary of Core Points on How to Read Candlesticks

◆ Candlesticks consist of four elements: open, close, high, low; bodies and shadows represent market strength

◆ Different timeframes suit different traders: short-term look at daily, medium-term at weekly, long-term at monthly

◆ Understanding the market logic behind candlesticks is more important than memorizing patterns—focus on the balance of bullish and bearish forces

◆ Observing closing positions, comparing body lengths, and identifying swing points are three fundamental skills

◆ In practice, learn to distinguish real from false breakouts, wait for multiple confirmations to avoid losses from fake signals

◆ Watching for shrinking bodies and volume changes can preemptively signal waning market momentum

Mastering how to read candlesticks is the core weapon of technical analysis. Instead of chasing complex indicator combinations, deeply understanding candlestick logic often helps you see the market more clearly and trade more effectively.