Candlestick stock chart reading or Japanese candlestick charting is a crucial skill for traders to understand the psychology of the market participants, as well as to benefit from reading the stock price movements, and therefore make wise investments and timing of markets. Candlestick charting is an ancient artform, as ancient as the dawn of the rice markets in ancient Japan. As old as it may be, candlestick charting is still alive in today’s virtual economic world: traders still use this technique to benefit from reading the psychology and behaviour of the participants in the market, which is depicted over the period of time the candle is drawn. Price alone does not indicate the whole story; during that period, there are numerous psychological influences going on, and the visual picture the candlestick technique draws greatly helps traders better understand this phenomenon. Today, chartists are finding candlestick chart patterns even more prevalent and useful in our ultra-fast and frantic financial markets. As Plato stated: ‘The proper time to increase our practice is when we are all most enthusiastic for it’, this guide can help you to read candlestick charts.

All of the information on one candlestick is the result of the tug of war between buyers and sellers in a time frame The candlestick has open, close, high and low prices, and the coloured candle and the length and wicks of the candlestick body provide a visual cue of the underlying market dynamics. With proper reading, this information could potentially reveal where the market is headed and where entry points are.

Market moods are also visually represented by candlestick patterns. A sequence of bullish candlesticks can imply the emergence of an uptrend characterised by high closing prices above opening prices. Conversely, a series of bearish candlesticks can be an indication of a downtrend, characterised by low closing prices below opening prices. The appearance of so-called Morning Stars (bullish reversals) or Evening Stars (bearish reversals) can be seen to be critical points in trading.

Technical indicators such as candlestick charts are not the only tools available to traders. A candlestick graph is a single part of an entire analytical jigsaw puzzle. It adds depth and context, giving traders a better perspective on potential moves and complementing other analytical tools and hypotheses. Using technical indicators such as RSI (relative strength index), MACD (moving average convergence/divergence) or Fibonacci retracements can help to produce a clearer picture of the market, and together these tools can be used to construct a better understanding of the market.

And while no method of predicting is foolproof, identifying candlestick patterns provides insights that, if used skillfully, can enrich a trader’s probabilities. In the short to medium term, a clearer picture of market psychology emerges when values are assessed in light of patterns such as ‘Doji’, which expresses lack of decision, and ‘Three White Soldiers’, which expresses a powerful up move.

There are certain candlestick formations that are famous for indicating reversals at important junctures: ‘Piercing Line’, ‘Dark Cloud Cover’, and so on. Good traders study these patterns carefully, because they can often be early signs of major market shifts, allowing them to get into the new trend right at the start.

On its own, candlestick charting particularly excels at revealing market psychology and possible shifts in market direction. But candlesticks are most effective when they are combined with other forms of analysis. Candlesticks are better than line and bar charts at showing market sentiment, but incorporating the analysis of volume analysis and technical indicators adds value to the analysis and helps us make better trading decisions.

Learning candlestick charts can be like learning a new language: as you progress along the chart, you gain new fluency in market dynamics and psychology. Candlesticks give an abundance of information about the possible movements of the market, but when combined with other forms of technical analysis, the power increases. As traders get better at reading and interpreting the signals, they can then bring that new awareness to the markets and may trade or invest with more confidence and focus. Candlestick charting is a must-know skill for any serious trader or investor.