How to read charts on the stock market? This question often comes up on the lips of novice investors. People who are just starting their adventure with cryptocurrencies often have a problem with understanding what is happening on the chart and, consequently, what implications it may have for the rate and profitability of their investments. In this text, we will focus on presenting how to begin to effectively read data from charts.
How to read charts?
There are several different types of charts in the investment markets. The simplest and most common is the line price chart – as shown in the picture below. It is perfect for showing the average price over a longer period of time. Such a graph can be found, for example, in cryptocurrency data aggregators – Coinmarketcap, Coinpaprika.
Reading the meaning of candlestick charts is definitely a bigger challenge. The construction of such charts differs from the linear ones. Candlestick charts date back to the 18th century in Japan. Their originator was a man named Homma. He found that even though there is a correlation between price and demand and supply in the rice market, traders’ emotions also play a role.
Candles show these emotions by visually representing price movements through different clones. Traders use candlestick patterns to make investment decisions based on repeating patterns that help predict short-term price movements.
Components of a candlestick chart
The candlestick chart gives us some information about the current market situation. Traditionally, this is information about the opening and closing price of a session, as well as the highest and lowest prices in a given period. The candle itself is divided into two parts, wide – also called the body, and vertical stripes – referred to as shadows.
The corpus represents the price discrepancy between the opening / closing price (session or period). When the body is filled with black, it means that the closing price was lower than the opening price. On the other hand, when the body remains empty, it means that the closing price exceeds the opening price. On stock exchanges and trading platforms, candles often have a different color – filled candles are red and empty candles green.
The shadows, on the other hand, show the maximum and minimum values traded during the session / period.
The short top shadow in the bullish candlestick indicates that the closing price of the session was close to the high of the day (during this period). The relationship between the body and shadow elements directly affects the final shape and color of the candle.
Sample patterns in a candlestick chart
As mentioned above, individual candles form sequences that traders use to predict future price movements in the market. Below we present you some basic candlestick formations. Remember, however, that this tool serves only as support in technical analysis – it does not provide 100% certainty when making an investment decision.
Bearish Engulfing Pattern
Bearish Engulfing Patter arises during an uptrend when sellers outstrip buyers. This pattern is reflected in the red long-bodied candle engulfing the smaller, green one. This pattern usually indicates that sellers have taken control of the market and the price will continue to fall.
Hossy Engagement – Bullish Engulfing Pattern
The bullish side takeover pattern occurs when buyers outweigh sellers. It is formed by the formation of a long green candle which engulfs a short red candle. Such a bullish pattern may be a signal for further price increases of a given asset.
Bearish Evening Star
The evening star is the pinnacle pattern. Arises when the last candle in the sequence is below the body of the previous short candle. The last candle is similar in length to that of two periods before. The pattern shows sellers’ control over buyers and may indicate an inheritance behavior.
How to read charts? Efficiently
The examples presented are just the tip of the gigantic number of patterns that can be found on candlestick charts. Knowing them can help you build short-term investment strategies. However, it is worth remembering that the knowledge of charts should also be supported by other elements. Earlier, we mentioned the use of the RSI indicator, and if you do not feel fit enough to invest yourself as a trader – you can always use the option of setting up a PAMM account.