What are candlestick charts?

For new traders starting out, trying to make sense of the volatile crypto markets can be incredibly difficult.

One minute, a cryptocurrency’s price rises only for it to drop sharply moments later, seemingly without warning.

Reacting to these movements can easily lead to repeated losses and bad trading habits, even among those more experienced.

So, how do successful traders avoid these scenarios and make better-informed decisions? A big part of it has to do with knowing how to read candlestick charts.

Candlestick charts offer a simplified way to visualize the price movement of an asset over a period of time.

Candlestick charts clearly display the changes between an asset’s opening price and closing price within a given time period, including the highest highs and lowest lows. 

Each candle on the chart represents a segment of time. Traders can configure candlestick time periods so that each candle represents one minute or as long as one year’s worth of activity. This can be helpful for identifying short or longer-term trends, respectively.

Knowing how to read candlestick charts is an important part of technical analysis — the practice of identifying past market trends in an effort to predict future price movements.

While the concept of predicting the future might sound like voodoo, countless traders attest to its effectiveness when used correctly.

Like learning a language, mastering technical analysis using candlesticks requires dedication, time, and consistency.

A Japanese rice merchant named Munehisa Honma created candlestick charts during the 18th century.

Rice markets played a huge role in fuelling Japan’s economy. Before his invention, rice was only traded according to the spot price. As a futures contracts market emerged, Honma took advantage of the new coupon trading market. 

Homma was among the first people to recognise the dynamics of supply and demand, as well as how trader emotion and psychology impacted price movement. This inspired him to create candlestick charts in order to capture how rice prices change over time. 

Over 200 years later, a 1991 book by Steve Nison entitled Japanese Candlestick Charting Techniques introduced the concept of Japanese candlestick charts to the western world.

You might ask — Why would an 18th century charting technique be useful for modern cryptocurrency trading?

It turns out that not much has changed in the last 200 years with regards to human emotions and market psychology. The same principles of fear and greed, supply and demand, still apply now just as they did back then.

In order to make the most of candlestick charts, it’s important to understand the anatomy of individual candlesticks. 

Each candlestick displays four pieces of information:

• Open: the price at the beginning of the new time interval

• Close: the price at the end of the time interval

• High: the highest price reached during the time interval

• Low: the lowest price reached during the time interval

While individual candlesticks can provide a lot of information, they become infinitely more powerful when viewed together.

Across a section of candlesticks, traders can often see clear patterns or lines appear on a price chart. These might be areas of resistance, where prices have consistently failed to break above a particular level, or support lines where prices have repeatedly rebounded from.

Reducing the time frames of candlesticks to short intervals, such as five minutes or thirty minutes, can sometimes allow traders to identify these areas more precisely.

Alternatively, increasing time frames to much longer-term intervals, such as one week or one month, can be useful for identifying historically strong areas of support and resistance.

In some cases, situations can emerge where several candlesticks form a repeating pattern on a chart that produce a consistent result. This might be a bullish breakout or a bearish downturn. Traders might rely on these historical patterns to predict future movements.

When reading candlesticks, time frame matters.

While a candle on a 15 minute chart may look promising, it should not carry as much weight if a similar looking candlestick appears on a weekly chart. 

A given traders' individual objectives will often dictate which time frames are important to them. But, no matter if they are starting out or a pro, the context of time frames matters when reading candlestick charts. 

A handy reference for time frame order of importance is: 

• Monthly
• Weekly
• Daily
• 4 Hour
• 1 Hour
• 30 Minute
• 15 Minute
• 1 Minute 

If you are interested in learning more about the different cryptocurrencies, you can visit Kraken’s Learn Center. There, you will find other guides on different trading concepts from hedging to derivatives. 

If you want to spot trading opportunities, you can bookmark Kraken’s price page, which allows you to follow the state of the cryptocurrency market.

From there, you can start putting your new knowledge of candlestick patterns to work with our advanced trading platform Kraken Pro. 

Buy, sell, trade and stake hundreds of cryptoassets like a pro using Kraken Pro today.