How to read candlestick charts? A complete guide from basic understanding to practical judgment

Mastering candlestick chart analysis is an essential course for technical trading. Whether for short-term operations or long-term investments, understanding candlestick charts is the foundation for market judgment. This article will systematically explain the principles of candlestick construction, multi-timeframe applications, and key practical judgment rules to help you interpret market signals as accurately as professional traders.

Core Composition of Candlestick Charts: Four Price Points Condensed into One Candle

Candlesticks, also known as K-lines or candle charts, visually represent four key prices within a specific period (opening price, highest price, lowest price, closing price). Through different colors and shapes, candlestick charts can quickly convey market sentiment and price trends.

Main Components of a Candlestick:

A candlestick consists of a real body and shadows. The real body is the rectangular part in the middle, representing the price range between open and close. If the closing price is higher than the opening price, the body is usually shown as red (bullish); if lower, it is green (bearish). Note that color definitions may vary across markets. For example, in US stocks, bullish candles are green and bearish are red, opposite to Taiwan stocks.

Shadows represent the extreme prices during the period. The line above the body is called the upper shadow, with its top indicating the highest price; the line below is the lower shadow, with its bottom indicating the lowest price. The length of shadows reflects the strength of bulls and bears in the market.

Time Dimensions of Candlestick Chart Applications: Daily, Weekly, Monthly K, Each with Its Purpose

Candlestick analysis can be applied across different timeframes. Daily K reflects intra-day price movements; weekly K shows the overall trend within a week; monthly K displays the battle between bulls and bears over a month. There are even yearly K for observing long-term multi-year trends.

Uses of Daily K: Suitable for short-term traders. By observing the shape changes of daily candles, traders can capture short-term price fluctuation opportunities within a few days. Daily candles change frequently, reflecting market sentiment promptly.

Uses of Weekly and Monthly K: For long-term value investors, daily data may be insufficient. They can use weekly or monthly candles to observe overall fluctuations over several weeks or months. Drawing trendlines on weekly or monthly charts helps make more accurate trend judgments. For monthly analysis, fundamental news can also be incorporated for a more comprehensive assessment.

The following table shows the difference between daily and weekly K of the same stock:

Interpretation of Candlestick Patterns: Key to Understanding Market Signals

Different candlestick patterns reflect various market states and trader psychology. Here are common patterns and their meanings:

Fully Bullish Candle (No shadows)

• Features: Close equals the highest price
• Implication: Buyers are strong, prices rise throughout the period without encountering resistance. This indicates dominance by bulls, and prices may continue upward.

Bullish Candle with Upper Shadow

• Features: Long upper shadow, short lower shadow
• Implication: Bulls pushed prices higher, but faced selling pressure at high levels. Prices pulled back, indicating market tug-of-war. Follow-up candles should be observed to confirm reversal.

Bullish Candle with Lower Shadow

• Features: Long lower shadow, short upper shadow
• Implication: Price initially declined, but bulls supported at low levels and pushed prices back up. This pattern can be a potential reversal signal.

Fully Bearish Candle (No shadows)

• Features: Close equals the lowest price
• Implication: Bears dominate, prices decline throughout the period with no support from bulls. Further decline is possible.

Bearish Candle with Shadows

• Features: Shadows of unequal length
• Implication: Long lower shadow indicates selling pressure met support; long upper shadow suggests buying attempts but lack of strength. The balance of forces determines future movement.

Four Major Rules of Candlestick Analysis: From Basics to Practical Application

Rule 1: Avoid rote memorization; understand candlestick patterns logically

Many beginners try to memorize patterns mechanically, which is a misconception. Candlestick patterns are essentially composed of four prices; understanding their relative relationships allows you to derive the meaning of any pattern easily. No need for memorization—observation of real market examples will make you proficient.

Rule 2: Observe the closing position to judge market control

Core question: Where is the closing price?

This helps traders understand whether the market is under bullish or bearish control.

• If a bullish candle closes near the high, it indicates buyers control the market
• If it closes near the open, it suggests weakening buying strength
• If a bearish candle closes near the low, it indicates sellers control the market
• If it closes near the open, it suggests weakening selling strength

Compare body length:
Compare the current candle’s body length with earlier candles. If the current body is significantly larger (more than twice), it shows strong buying or selling force, indicating a clear trend. Similar sizes suggest market balance.

Rule 3: Identify wave points to determine main trend direction

The most intuitive way to read candlestick charts is to observe how the highs and lows of waves move:

• Uptrend: Higher highs and higher lows, with new highs continuously broken
• Downtrend: Lower highs and lower lows, with new lows continuously broken
• Consolidation: Highs and lows stay at similar levels, with prices oscillating within a range

Drawing support and resistance lines helps traders identify these turning points, clarifying whether the market is trending or reversing.

Rule 4: Accurately predict market reversals to seize low-risk opportunities

Forecasting turning points is key to finding low-risk, high-reward trades. The three-step approach:

Step 1: Confirm key levels
Wait for prices to reach support or resistance lines and observe signs of breakout or failure.

Step 2: Look for weakening signals
When candle bodies shrink and trend momentum weakens, combined with volume and indicators (like KD), it indicates the current trend is losing strength.

Step 3: Wait for reversal confirmation
As retracements weaken and momentum shifts, new trading opportunities emerge. Execute strategies accordingly.

Practical Candlestick Chart Skills

Skill 1: Rising wave lows = strong buying force

Many traders worry about reaching resistance and think about shorting, but they overlook an important signal: Are the wave lows gradually rising?

If wave lows are rising toward resistance, it indicates buyers are pushing prices higher, and sellers lack strength to push down. Usually, prices will continue upward. This pattern often appears as an ascending triangle, a strong visual signal.

Skill 2: Overbought/oversold momentum signals warn of reversals

When momentum indicators show overbought or oversold signals, the probability of reversal increases significantly.

A sharp decrease in momentum suggests buyers can no longer push prices higher. As prices fall, buyer interest diminishes. This creates a “liquidity gap,” indicating market consensus is breaking down, and reversal is imminent.

Skill 3: Identify false breakouts to avoid being trapped

Many investors are troubled by false breakouts: the market breaks above a high with a large bullish candle, prompting long entries. But soon after, the market reverses, forcing stop-losses. This is a “false breakout.”

To avoid this trap: Identify support and resistance levels, and when price pulls back and fails to break through, trade in the direction of the false breakout. For example, if an upward breakout fails, look for short opportunities near resistance. This turns a false breakout into a profit opportunity.

Three Key Points to Master Candlestick Charts

◆ Basic structure and meaning of candlestick patterns are the foundation of all analysis. Understanding the relationships among open, close, high, and low prices is essential for interpreting any pattern.

◆ Focus on two key factors: closing position and body length. No need to memorize pattern names; observing these factors allows you to judge the market’s bullish or bearish strength. Practice with examples to develop intuition.

◆ Trend of wave points is crucial. Recognizing the direction of highs and lows helps accurately identify the main trend and avoid being misled by short-term fluctuations.

◆ Weakening force signals potential reversals. When candle bodies shrink and retracements increase, it indicates the original trend is losing momentum, and reversal opportunities may arise. Be alert and prepared.

Candlestick analysis requires continuous practice and summary in real trading. Every market fluctuation is a learning opportunity. By systematically applying these rules, you can discover trading opportunities amid complex price movements and make more rational decisions.